Federal authorities are investigating a Virginia-based finance company that went belly-up last year, sticking hundreds of real-estate investors with millions of dollars in losses, The Post has learned.
The 440 investors had parked the proceeds from their real-estate sales with LandAmerica 1031 Exchange Services Inc. in hopes of delaying capital gains taxes – only to find their entire investment nest egg missing.
Some skewered by the bankruptcy are calling LandAmerica’s operation a Ponzi scheme that misappropriated the deposits and then paid off older customers with the cash of newcomers.
And worse, the Internal Revenue Service wants those burned in the failure of LandAmerica and other so-called “qualified intermediaries” to pay taxes on the profits they no longer have.
Former day care provider Rosanna Passantino, 51, and her husband, Giuseppe, 55, are devastated by the loss and the prospect of still paying taxes. Both are disabled with no current income and are talking with the Federal Bureau of Investigation about the matter.
In October, the Passantinos sold an investment home in Brooklyn and placed $351,570.35 with LandAmerica. The couple then put down $21,000 to buy a New Jersey home that they planned to rent out. Instead of living off investments, the Passantinos are living off a home-equity loan.
Under IRS rules, a “qualified intermediary” like LandAmerica can hold the proceeds from the sale of an investment property for up to 180 days in escrow-like accounts, called 1031 accounts, until the seller closes on a similar property. If they close within six months no capital gains taxes are due on the profits from the sale.
One civil lawsuit charges LandAmerica not only with improperly pooling some of the customers’ funds but claims that it got greedy and invested at least $100 million in auction-rate securities backed by student loans. A second lawsuit claims the ARS investment was $207 million.
When the market for those securities dried up last February, the executives, G. William Evans and Stephen Connor, began a Ponzi scheme to pay off clients, the lawsuit charges.
California lawyer Robert L. “Rusty” Brace, who filed class action lawsuits against LandAmerica and other 1031 companies, said “for a lot of the people, this is all their money, and it’s gone and they were lied to and they are upset.”
The LandAmerica failure and FBI probe highlight a growing issue for 1031 accounts. When Congress created these so-called “Starker exchanges,” they forgot to regulate the companies that run the 1031 accounts.
