What a Mess

It's happened before: a 1031 intermediary shuts its doors and takes investors' cash along with. The worst part about these kinds of failures is that the IRS does not care that you lost your money. Obviously, without the proceeds cash to complete the 1031, you're pretty much SOL. It's still your responsibility to pay those (thought to be) deferred taxes. No one's really sure how much money has been lost...the largest 1031 loss so far was the implosion of The 1031 Tax Group LLC in 2007 with $130-million in 1031 funds missing. The latest catastrophe is that of Vesta Strategies. See below.

Former clients of Vesta Strategies LLC have been livid that the facilitator of tax-deferred real-estate transactions shut its doors last month without returning several million dollars of their money. Now California authorities are getting involved.

The district attorney's office in Santa Clara County last week searched four properties associated with Vesta, including two Vesta offices and the homes of its former chief executive, Robert Estupinian, and former operations chief, Peter Ye. The investigators seized 60 boxes of Vesta documents, according to Santa Clara Deputy District Attorney Mike Fitzsimmons.

"I'm getting calls from all over the country from investors who gave their money to Vesta," Mr. Fitzsimmons says. "We're going to...coordinate our efforts as appropriate with other agencies."

Mr. Estupinian, who left Vesta last November, said Tuesday that he is cooperating with the DA's office. Mr. Ye didn't return messages seeking comment. John Terzakis, a Chicago businessman and majority owner of Vesta, on Tuesday mailed settlement offers to several Vesta clients, his spokesman said. Mr. Terzakis and Mr. Estupinian have sued each other in federal court, each accusing the other of embezzling from Vesta.

As a so-called qualified intermediary, Vesta held money for investors who had sold a property and intended to use the proceeds to purchase another. Under section 1031 of the Internal Revenue Code, investors doing such like-kind transactions can defer paying certain taxes on the deals if they adhere to criteria such as parking the money in the interim with a disinterested intermediary. From WSJ.