A $2,000,000 interest-free loan from the customer, exempted by Treasury for six months.

Start with the regulation that makes the arrangement a loan, because everything else follows from it. Treas. Reg. § 1.468B-6 was written for exactly this and applies “to transfers of relinquished property made by taxpayers on or after October 8, 2008.” Paragraph (b)(3) defines the exchange facilitator as “a qualified intermediary, transferee, escrow holder, trustee, or other party that holds exchange funds for a taxpayer in a deferred exchange.” Paragraph (c)(1) is headed, in the regulation’s own words, “Exchange funds generally treated as loaned to an exchange facilitator,” and says the facilitator “must take into account all items of income, deduction, and credit (including capital gains and losses) attributable to the exchange funds.” That is the default. The customer’s money becomes the intermediary’s income unless something else is agreed.

Paragraph (c)(2) is the something else, and it is drafted as an escape rather than as the rule. It “applies if, in accordance with an escrow agreement, trust agreement, or exchange agreement, as applicable, all the earnings attributable to a taxpayer’s exchange funds are paid to the taxpayer” — and (c)(2)(ii)(A) says one way to get there is a “separately identified account”, meaning “an account established under the taxpayer’s name and taxpayer identification number with a depository institution,” or a sub-account the bank credits in the taxpayer’s name. Where that is done, “exchange funds are not treated as loaned,” and the taxpayer takes the income. Two regimes, one regulation, and the switch between them is a sentence in a contract the customer rarely reads.

Then the exemption, which is the part almost nobody has read. Section 7872 exists to stop people making interest-free loans to each other for tax reasons; it imputes the missing interest. Treas. Reg. § 1.7872-5(a) lists the loans it will not apply to “because the interest arrangements do not have a significant effect on the Federal tax liability of the borrower or the lender,” and (b)(16) names one of them: “An exchange facilitator loan (within the meaning of § 1.468B-6(c)(1)) if the amount of the exchange funds … treated as loaned does not exceed $2,000,000 and the duration of the loan is 6 months or less.” The Commissioner may raise the $2,000,000 by published guidance. The section applies “to exchange facilitator loans issued on or after October 8, 2008.”

Read those two numbers against the statute. 26 U.S.C. 1031(a)(3) treats replacement property as not like-kind unless it is identified within 45 days and received within 180 days of the transfer. Six months is 182.6 days. The exemption’s duration limit is therefore not a round number chosen at random; it is the longest a lawful exchange can run, with a few days to spare. And the cap is 3.48× the median exchange: the overwhelming majority of deals fit inside it. The regulation is shaped like the deal.

Now the money, which is where the consensus is simply wrong. Every comparison of intermediaries is a comparison of fees. Exeter’s own published fee page prints “$1,100.00 to $1,800.00” for a setup covering one relinquished and one replacement property, $200 to $500 for each additional property, and $7,500 to $15,000 or more for reverse and improvement exchanges. The same page says, in a sentence that is doing more work than any fee table, that intermediaries “retain all or a portion of the interest income earned on your tax-deferred exchange funds.” At the published median relinquished price of $575,000 and the 4.01% three-month bill rate, the float runs at $63.17 a day. It passes the whole fee on day 22.95. At day 90 it is $5,685.41; at day 180, $11,370.82, or 7.84× the fee. On a mid-case exchange the advertised price is 20.32% of what the intermediary makes.

So who is allowed to hold the money? This is where the United States stops having one answer. Nevada requires a licence: NRS 645G.100(1), “a person shall not act as an exchange facilitator unless he or she is licensed as such with the Division,” plus fidelity bonds “in a total amount of not less than $1,000,000” and errors-and-omissions cover “in an amount not less than $250,000,” a unique identifier in the Registry, and a gross misdemeanor and $200 a day for acting without one. California requires no licence but, at Financial Code § 51003, one of three things: a $1,000,000 fidelity bond, $1,000,000 deposited in an interest-bearing account — on which, the section says, the interest goes to the facilitator — or all exchange funds in a qualified escrow or trust with dual written authorisation. Washington requires no licence either, and offers the same bond-or-escrow choice at RCW 19.310.040(1)(a) with $250,000 of E&O at 19.310.060(1). In most of the country there is nothing at all. A thing that can hold $2,000,000 of a stranger’s money is priced at $1,000,000 of bond in one state and at zero in the next.

Washington is the one that read the federal regulation and legislated against it. RCW 19.310.110(1), enacted at 2009 c 70 s 12 and amended at 2013 c 228 s 6, requires the facilitator to “deposit all client funds in a separately identified account, as defined in treasury regulation section 1.468B-6” — the state statute cites the federal citation — “and the client must receive all the earnings credited to the separately identified account.” There is no “unless otherwise agreed.” Washington took the federal escape hatch and made it compulsory, which removes 79.68% of a mid-case intermediary’s revenue by operation of law. The same chapter also requires the facilitator to publish, conspicuously, on its own website, that “exchange facilitation services are not regulated by any agency of the state of Washington” — a mandated disclosure of the absence of a mandate, in the same chapter that makes a breach of the bond rule a class B felony.

And the reason all three statutes exist is dated 4 August 2009. On that day Edward H. Okun, owner of The 1031 Tax Group LLP, was sentenced to 100 years in prison and $40 million of forfeiture by Judge Robert E. Payne in the Eastern District of Virginia, for taking roughly $126 million of client exchange funds. The FBI’s release records that the firm “obtained funds by promising clients that their money would be used solely to effect 1031 exchanges.” Washington’s chapter is 2009. Nevada’s licence followed. The rest of the country read the same newspaper and did nothing, and the federal regulation that makes the money a loan to the intermediary was finalised the year before, effective 8 October 2008.

Which is the finding. The scarce input here is not capital and not a licence: it is deal flow, and deal flow comes from the closers — the agents, title officers and CPAs who meet the seller before you do. The entry price is an entity, an exchange agreement and a bank relationship, which $500 covers in the states that ask for nothing. The constraint is that the thing you are selling is not a service at all. It is the right to hold somebody’s money for 180 days, at a price the federal government has specifically declined to impute. $5,000 a month after 2026 federal tax is $78,212.05 of profit, which is 11.03 exchanges a year with the float and 54.28 without it — and 1.92 at the exemption cap, which is to say two.