1031 Exchange Rules Virginia

Section 1031 of the Internal Revenue Code allows taxpayers to enter into an exchange of property instead of a traditional sale in order to defer the payment of capital gains taxes that would otherwise be due. Because of the various and complex rules that must be followed for a transaction to qualify as a Section 1031 Exchange, a Qualified Intermediary, or QI, is required to facilitate the transaction. In short, a QI facilitates the exchange through the use of an Exchange Agreement and Assignments of the relinquished and replacement property Purchase and Sale Agreements entered into by the QI and the taxpayer. Part of the QI’s role is to hold, and ultimately transfer between the parties, funds that are used in the transaction. Given the fiduciary role of a QI, individual states have enacted laws specifically aimed at Qualified Intermediaries in an attempt to prevent misappropriation of funds. In Virginia, § 55-525.1 et seq. addresses the duties and responsibilities of a QI, who is referred to as an Exchange Facilitator in Virginia.

Exchange Facilitators Act

Commonly referred to as the Exchange Facilitators Act, the Virginia law provides a number of important rules that apply to anyone acting as a QI within the Commonwealth. In summary, the rules found within the Exchange Facilitators Act include the following:

  • Anytime there is a change in control in the exchange facilitator, or EF, that involves property located within the Commonwealth of Virginia, the EF must notify the client within the ten business days via facsimile, e-mail, or first class e-mail as well as by posting the change on the EF’s website.
  • Funds used for the exchange must be deposited into a separately identified account. Withdrawals from the account require authorization from both the EF and the client.
  • Funds must be held in a qualified escrow or trust account.
  • Interest on funds held in an exchange account shall accrue to the parties pursuant to a written agreement between the EF and the client.
  • An EF must maintain an errors and omission policy OR deposit cash OR provide irrevocable letters of credit in an amount of not less than $250,000 at all times.
  • Funds held for the purpose of facilitating an exchange cannot be co-mingled.
  • An EF cannot lend or transfer funds to any person or entity related to, or affiliated with, the EF.
  • Exchange funds are not subject to execution or attachment against any claim made against the EF.

In addition to the above general rules and regulations regarding the responsibilities and duties of an EF in the Commonwealth of Virginia, there are also a number of prohibited acts relating to an EF, including:

  • Making material representations that are intended to mislead another.
  • Pursuing a continued course of misrepresentations or engaging in false advertising that is intended to mislead.
  • Failing to account for monies or property that are in the possession of the EF but that belong to another within a reasonable period of time.
  • Engaging in conduct that amounts to fraudulent or dishonest dealings.
  • Committing any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or other theft of property;
  • Materially failing to fulfill its contractual duties to the exchange client to deliver property or funds to the exchange client unless such failure is due to circumstances beyond the control of the EF
  • An owner, officer, director, or employee of an EF is prohibited from committing any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or other theft of property

In the event that an EF breaches any of these duties or materially violates any of the provisions of the law, there are penalties that apply. A fine of up to $2,500 per occurrence may be recovered for the Literary Fund. In addition, reasonable expenses and costs may be recovered.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.