Exchange Facilitators

Section § 51000

Explanation

This section defines key terms related to the conduct of business as an exchange facilitator for like-kind property exchanges. A 'client' is the taxpayer entering into an agreement with an exchange facilitator, who is someone that helps facilitate these exchanges for a fee. This person might take on different roles like holding property titles or holding funds, except in specific situations like certain financial institutions or educational scenarios.

'Exchange facilitators' must have a physical presence in the state and actively promote their services to the public. However, the law excludes several entities from being considered facilitators, such as certain financial institutions, educational seminar providers, and specific title and escrow companies.

The text also explains what constitutes a 'fee' as any form of compensation for these services, defines a 'financial institution,' and describes an 'affiliated' person in terms of control relationships among entities. It also highlights what a 'person' legally constitutes and describes the 'prudent investor standard' as it relates to investment conduct.

As used in this division, the following terms shall have the following meanings:
(a)CA Financial Code § 51000(a) “Client” means the taxpayer with whom the exchange facilitator enters into an agreement described in subparagraph (A) of paragraph (1) of subdivision (b).
(b)Copy CA Financial Code § 51000(b)
(1)Copy CA Financial Code § 51000(b)(1) “Exchange facilitator” means a person that does any of the following:
(A)CA Financial Code § 51000(b)(1)(A) Facilitates, for a fee, as defined in subdivision (c), an exchange of like-kind property by entering into an agreement with a taxpayer by which the exchange facilitator acquires from the taxpayer the contractual rights to sell the taxpayer’s relinquished property located in this state and transfers a replacement property to the taxpayer as a qualified intermediary as that term is defined under Treasury Regulation Section 1.1031(k)-1(g)(4), or enters into an agreement with the taxpayer to take title to a property in this state as an exchange accommodation titleholder (EAT) as that term is defined in Internal Revenue Service Revenue Procedure 2000–37, or enters into an agreement with a taxpayer to act as a qualified trustee or qualified escrow holder as those terms are defined under Treasury Regulation Section 1.1031(k)-1(g)(3), except as provided in paragraph (2).
(B)CA Financial Code § 51000(b)(1)(B) Maintains an office in this state for the purpose of soliciting business as an exchange facilitator.
(C)CA Financial Code § 51000(b)(1)(C) Holds himself, herself, or itself out as an exchange facilitator by advertising any of the services listed in paragraph (A) or soliciting clients in printed publications, direct mail, television or radio advertisements, telephone calls, facsimile transmissions, or other electronic communications directed to the general public in this state for purposes of providing any of those services.
(2)CA Financial Code § 51000(b)(2) “Exchange facilitator” does not include any of the following:
(A)CA Financial Code § 51000(b)(2)(A) A taxpayer or a disqualified person, as that term is defined under Treasury Regulation Section 1.1031(k)-1(k), seeking to qualify for the nonrecognition provisions of Section 1031 of the Internal Revenue Code of 1986, as amended.
(B)CA Financial Code § 51000(b)(2)(B) A financial institution that is acting as a depository for exchange funds or that is acting solely as a qualified escrow holder or qualified trustee, as those terms are defined under Treasury Regulation Section 1.1031(k)-1(g)(3), and that is not facilitating exchanges.
(C)CA Financial Code § 51000(b)(2)(C) A title insurance company, underwritten title company, or escrow company that is acting solely as a qualified escrow holder or qualified trustee, as those terms are defined under Treasury Regulation Section 1.1031(k)-1(g)(3), and that is not facilitating exchanges.
(D)CA Financial Code § 51000(b)(2)(D) A person that advertises for and teaches seminars or classes, or otherwise makes a presentation, to attorneys, accountants, real estate professionals, tax professionals, or other professionals, when the primary purpose is to teach the professionals about tax-deferred exchanges or to train them to act as exchange facilitators.
(E)CA Financial Code § 51000(b)(2)(E) A qualified intermediary, as that term is defined under Treasury Regulation 1.1031(k)-1(g)(4), who holds exchange funds from the disposition of relinquished property located outside this state.
(F)CA Financial Code § 51000(b)(2)(F) An entity in which an exchange accommodation titleholder (EAT) has a 100 percent interest and which is used by the EAT to take title to property in this state.
(c)CA Financial Code § 51000(c) “Fee” means compensation of any nature, direct or indirect, monetary or in-kind, that is received by a person or related person as defined in Section 267(b) or 707(b) of the Internal Revenue Code for any services relating to or incidental to the exchange of like-kind property.
(d)CA Financial Code § 51000(d) “Financial institution” means a bank, credit union, savings and loan association, savings bank, or trust company chartered under the laws of this state or the United States whose accounts are insured by the full faith and credit of the United States, the Federal Deposit Insurance Corporation, the National Credit Union Share Insurance Fund, or other similar or successor programs.
(e)CA Financial Code § 51000(e) A person is “affiliated” with another specified person if the person directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the other specified person.
(f)CA Financial Code § 51000(f) “Person” means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust, or any other form of a legal entity, and includes the agents and employees of that person.
(g)CA Financial Code § 51000(g) “Prudent investor standard” means the prudent investor rule described in Article 2.5 (commencing with Section 16045) of Chapter 1 of Part 4 of Division 9 of the Probate Code.
exchange facilitator like-kind property qualified intermediary ...

Section § 51001

Explanation

This law requires businesses operating as exchange facilitators to notify their clients in California about any change in control of the company. A 'change in control' happens when more than 50% of the company's assets or ownership is transferred. The notification must be given within 10 business days and shared through various means such as email or mail and must also be posted on the company's website for at least 90 days. The notice must include the new owner's contact details.

(a)CA Financial Code § 51001(a) A person who engages in business as an exchange facilitator shall notify all existing exchange clients whose relinquished property is located in this state, or whose replacement property held under a qualified exchange accommodation agreement is located in this state, of any change in control of the exchange facilitator. That notification shall be provided within 10 business days of the effective date of the change in control by hand delivery, facsimile, electronic mail, overnight mail, or first-class mail, and shall be posted on the exchange facilitator’s Internet Web site for at least 90 days following the change in control. The notification shall set forth the name, address, and other contact information of the transferees.
(b)CA Financial Code § 51001(b) For purposes of this section, “change in control” means any transfer of more than 50 percent of the assets or ownership interests, directly or indirectly, of the exchange facilitator.
exchange facilitators change in control business notification ...

Section § 51003

Explanation

Anyone conducting business as an exchange facilitator must ensure they meet certain financial protections to safeguard client funds. They should either maintain a fidelity bond worth at least $1,000,000, have a cash or securities deposit of the same amount in an interest-bearing account, or keep exchange funds in a qualified escrow or trust account that requires both the facilitator's and client's written permission for withdrawals.

Facilitators can exceed these minimum requirements if they wish, and being covered under a fidelity bond totaling at least $1,000,000 also fulfills these obligations.

(a)CA Financial Code § 51003(a) A person who engages in business as an exchange facilitator shall at all times comply with one or more of the following:
(1)CA Financial Code § 51003(a)(1) Maintain a fidelity bond or bonds in an amount not less than one million dollars ($1,000,000), executed by an insurer authorized to do business in this state or an eligible surplus line insurer pursuant to Section 1765.1 of the Insurance Code.
(2)CA Financial Code § 51003(a)(2) Deposit an amount of cash or securities or irrevocable letters of credit in an amount not less than one million dollars ($1,000,000) in an interest-bearing deposit account or a money market account with the financial institution of the person’s choice. Interest on that amount shall accrue to the exchange facilitator.
(3)CA Financial Code § 51003(a)(3) Deposit all exchange funds in a qualified escrow account or qualified trust, as those terms are defined under Treasury Regulation 1.1031(k)-1(g)(3), with a financial institution and provide that any withdrawals from that escrow account or trust require that person’s and the client’s written authorization.
(b)CA Financial Code § 51003(b) A person who engages in business as an exchange facilitator may maintain a bond or bonds or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts.
(c)CA Financial Code § 51003(c) If the person engaging in business as an exchange facilitator is listed as a named insured on one or more fidelity bonds that total at least one million dollars ($1,000,000), the requirements of this section shall be deemed satisfied.
exchange facilitator fidelity bond financial protections ...

Section § 51005

Explanation

If someone has been harmed because a business acting as an exchange facilitator didn't follow the rules, they can make a claim against certain financial protections like bonds, deposits, or letters of credit. The goal is to recover their losses based on the terms of these protections. If a payment is made from these financial protections, their total value decreases by the amount paid out.

Any person claiming to have sustained damage by reason of the failure of a person engaging in business as an exchange facilitator to comply with this division may file a claim on the bonds, deposits, or letters of credit described in Section 51003 to recover the damages subject to the terms and conditions of the bonds, deposits, or letters of credit. The amounts of the bonds, deposits, or letters of credit shall be reduced to the extent of any payment made.
exchange facilitator financial claim bonds ...

Section § 51007

Explanation

If you run a business as an exchange facilitator, you must either have insurance or deposit funds worth at least $250,000. This ensures you can cover any errors or omissions in your work. The insurance must be from a qualified insurer or you can deposit the money in a financial account that earns interest for you. You're allowed to maintain more than this minimum amount if you choose. If you're named on an insurance policy worth at least $250,000, that counts as meeting the requirement.

(a)CA Financial Code § 51007(a) A person who engages in business as an exchange facilitator shall at all times comply with either of the following:
(1)CA Financial Code § 51007(a)(1) Maintain a policy of errors and omissions insurance in an amount not less than two hundred fifty thousand dollars ($250,000), executed by an insurer authorized to do business in this state or an eligible surplus line insurer pursuant to Section 1765.1 of the Insurance Code.
(2)CA Financial Code § 51007(a)(2) Deposit an amount of cash or securities or irrevocable letters of credit in an amount not less than two hundred fifty thousand dollars ($250,000) in an interest-bearing deposit account or a money market account with the financial institution of the person’s choice. Interest on that amount shall accrue to the exchange facilitator.
(b)CA Financial Code § 51007(b) A person who engages in business as an exchange facilitator may maintain insurance or deposit an amount of cash or securities or irrevocable letters of credit in excess of the minimum required amounts.
(c)CA Financial Code § 51007(c) If the person engaging in business as an exchange facilitator is listed as a named insured on an errors and omissions policy of at least two hundred fifty thousand dollars ($250,000), the requirements of this section shall be deemed satisfied.
exchange facilitator errors and omissions insurance minimum insurance requirement ...

Section § 51009

Explanation

If you're an exchange facilitator, it's your job to responsibly manage your clients' exchange funds. You must keep these funds separate from your business accounts and invest them wisely to keep them safe and easy to access when needed. Avoid mixing client funds with your own business accounts or loaning them out to related businesses unless it's part of the exchange agreement. Ensuring that exchange funds are not at risk and are readily available to fulfill your obligations is crucial.

Also, your clients' funds should not be liable for any of your business debts. Don't mislabel or misuse clients' funds in any bank accounts. Only label funds as belonging to a specific client if they indeed belong to that client and were given to you for managing.

(a)CA Financial Code § 51009(a) A person who engages in business as an exchange facilitator shall have the responsibility to act as a custodian for all exchange funds, including, but not limited to, money, property, other consideration, or instruments received by the person from, or on behalf of, a client, except funds received as the person’s compensation. A person who engages in business as an exchange facilitator shall invest those exchange funds in investments that meet a prudent investor standard and that satisfy the investment goals of liquidity and preservation of principal. For purposes of this section, a prudent investor standard is violated if any of the following occurs:
(1)CA Financial Code § 51009(a)(1) Exchange funds are knowingly commingled by the exchange facilitator with the operating accounts of the exchange facilitator.
(2)CA Financial Code § 51009(a)(2) Exchange funds are loaned or otherwise transferred to any person or entity, other than a financial institution, that is affiliated with or related to the exchange facilitator. This paragraph does not apply to the transfer of funds from an exchange facilitator to an exchange accommodation titleholder in accordance with an exchange contract.
(3)CA Financial Code § 51009(a)(3) Exchange funds are invested in a manner that does not provide sufficient liquidity to meet the exchange facilitator’s contractual obligations to its clients and does not preserve the principal of the exchange funds.
(b)CA Financial Code § 51009(b) Exchange funds shall not be subject to execution or attachment on any claim against the exchange facilitator. An exchange facilitator shall not knowingly keep, or cause to be kept, any money in any bank, credit union, or other financial institution under a name designating the money as belonging to the client of any exchange facilitator, unless that money belongs to that client and was actually entrusted to the exchange facilitator by that client.
exchange facilitator exchange funds custodian responsibilities ...

Section § 51011

Explanation

If you're doing business as an exchange facilitator in California, there are certain things you're strictly prohibited from doing. You can't lie or mislead people about exchanges and can't make false claims, whether in ads or elsewhere. You need to handle other people's money or property responsibly and can't engage in any shady or dishonest activities. You also must not commit crimes like fraud or theft, and you must stick to your contracts unless something happens that's out of your control.

A person engaged in business as an exchange facilitator shall not do any of the following:
(a)CA Financial Code § 51011(a) Make any material misrepresentations concerning any like-kind exchange transaction that are intended to mislead.
(b)CA Financial Code § 51011(b) Pursue a continued or flagrant course of misrepresentation, or make false statements through advertising or otherwise.
(c)CA Financial Code § 51011(c) Fail, within a reasonable time, to account for any moneys or property belonging to others that may be in the possession of, or under control of, the person.
(d)CA Financial Code § 51011(d) Engage in any conduct constituting fraudulent or dishonest dealings.
(e)CA Financial Code § 51011(e) Commit any crime involving fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or theft.
(f)CA Financial Code § 51011(f) Materially fail to fulfill its contractual duties to a client to deliver property or funds to the client, unless that failure is due to circumstances beyond the control of the person engaging in business as an exchange facilitator.
exchange facilitator like-kind exchange material misrepresentation ...

Section § 51013

Explanation

If someone breaks the rules in this section, they can be sued in a court that has the authority to handle the case.

A person who violates this division is subject to civil suit in a court of competent jurisdiction.
violations civil suit court ...