Tenant-in-Common exchanges, also called 1031 exchanges due to the use of section 1031 of the Internal Revenue Code, allow investors to defer capital gains when the equity from the sale of one property is exchanged for another commercial property. However, in 2002, the IRS has allowed sellers of these properties to join in with others as “tenants-in-common” in a larger property. Only a couple years after this change FINRA registered securities brokers, became the largest seller of these types of transactions. These brokers owe their clients a duty of due diligence and must make a reasonable investigation to ensure that the offering documents used in the transaction do not contain false or misleading information. At minimum, this must include background checks on the sponsor’s principals, a review of agreements and an inspection of the property. The NASD has also repeatedly stated that a broker may not simply rely on the issuer of the security for the information they use in their due diligence reviews. Further, the broker must make a suitability analysis prior to recommending such a transaction to their clients, such as whether or not a client’s financial situation is appropriate for such an illiquid investment.
The NASD has also called these securities “non-conventional investments” and thus the brokers are required to, “(1) conduct appropriate due diligence with respect to these products; (2) perform a reasonable-basis suitability analysis; (3) perform customer-specific suitability analysis for recommended transactions; (4) ensure that promotional materials used by the member are fair, accurate, and balanced; (5) implement appropriate internal controls; and (6) provide appropriate training to registered representatives that sell these products.”
If you were sold a Tenant-in-Common or 1031 exchange by a broker, you may be entitled to recover some of your losses. Please contact SanDiego@Thieler-Boeh-Seitz.com
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