Tax Guru – Ker$tetter Letter

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Informing Clients About 1031 Exchanges

Posted by taxguru on March 14, 2007

Q:

Subject: Exchange Question
 
Hello,
 
I was never informed by my Realtor of this 1031 rule. Now, after the exchange, I was just notified by my accountant that I owe a large amount of money. Has anyone won lawsuits against Realtors for mistakes made by not even mentioning that I should contact a tax specialist when asked if we are doing everything correctly in this transaction?
 
Thanks,

A:

That’s a very interesting question because in all of my speeches and seminars to Realtors over the past decades, I have always made a big point of stressing that if they ever smell any possibility of a 1031 exchange being relevant with a client’s property, they should advise that client to consult with his/her personal professional tax advisor to see if in fact the deal should be structured as a 1031. 

It is not the Realtor’s job to actually advise on the feasibility of a 1031 for a particular client because that is well outside their area of expertise and responsibility, and they couldn’t possibly have enough specific information to render a competent analysis. 

I always warn Realtors that if a client were to learn after the fact about 1031s, and that subject was not mentioned, s/he could try to sue the Realtor for the taxes that had to be paid.  Many Realtors accused me of being an alarmist by discussing this possibility; but I assured them that it was based on real life situations that I have seen, as well as calls and emails such as yours. 

I am not a big believer in litigation for every little thing that happens; so only you can decide if it’s worth it to you.  Over the past 30 years, I have seen instances where Realtors have been sued for this kind of alleged negligence.  The results have been all across the board.  In some cases, the judges awarded nothing because they believed that the taxes would have been due some time anyway and that the clients were at fault for not being smart enough to consult with their own tax advisors before selling a highly appreciated property.  In some cases, Realtors were required to reimburse clients for some or all of the taxes they had to pay because Section 1031 wasn’t used.  In other cases, there were out of court settlements for compromised amounts. 

I am not an attorney, but my understanding of the current trend in regard to this kind of issue is that, since 1031s have been around for so long now, it is becoming more difficult to convince a court that an experienced real estate investor has never heard of it.  You would most likely have a better case of winning if you can convince the court that you are not a frequent real estate seller and are not very knowledgeable in tax saving strategies.  If it is true that you have just now learned about 1031 exchanges for the first time, that must be the case. 

There is no way to know how your case would turn out.  You will need to discuss the merits of your case with an attorney and/or the managing broker in the office of your listing Realtor.

Good luck.

Kerry Kerstetter

 

 

 

 

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