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Wong v. Wong: Broker Has No Duty to Advise Client of Transaction's Tax Consequences

A California court has considered whether a real estate professional was negligent by failing to advise his client about the potential tax advantages for structuring his transaction as a tax-free 1031 exchange.

Reggie Wong ("Seller") was represented by Ed Wong of Fred Sands City Properties ("Brokerage") in the sale of a property owned by the Seller. Following the completion of the transaction, the Seller brought a lawsuit against the Brokerage alleging that the Brokerage had negligently failed to advise the Seller on how to defer paying capital gains tax on the sale of his property by pursuing a 1031 tax exchange procedure. The trial court ruled in favor of the Brokerage, and the Seller appealed.

Under Internal Revenue Code §1031, if an individual exchanges business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized. If, as part of the exchange, the individual also receives other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized. A taxpayer is allowed to postpone the recognition of gain on the sale of qualifying property by the acquisition of replacement real property that will be later identified and purchased within a specific period of time. To learn more about 1031 exchanges, click here.

The California Court of Appeal, First District, affirmed the ruling of the trial court in an unpublished decision. The Brokerage argued that California law requires real estate professionals to include a disclosure in agency agreements advising their clients that if the clients seek legal or tax advice, the clients need to obtain this advice from a "competent professional" such as a lawyer or an accountant Additionally, the Brokerage argued that the Supreme Court of California had previously ruled that brokers had no duty to advise their clients on how to structure their transaction as a 1031 exchange.

The court agreed that the Brokerage had no duty to advise the Seller about possibly structuring his transaction as a 1031 exchange. The court found the Brokerage had made the required disclosure in the agency agreement instructing the Seller to seek advice from a "competent professional" for tax advice and the court ruled that the Brokerage had no additional obligation to specifically advise the Seller that he should seek such advice. The court stated that requiring real estate professionals to spot "legal issues" for its clients could vastly expand their liability and only the legislature could properly expand the liability of real estate professionals in this way. Thus, the court affirmed the lower court ruling.

Wong v. Wong, No. 306047, 2003 WL 21299980 (Cal. Ct. App. June 6, 2003). [Note: This opinion was not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion].
TO COMPLY WITH CERTAIN U.S. TREASURY REGULATIONS, WE INFORM YOU THAT, UNLESS EXPRESSLY STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THE TEXT OF THIS COMMUNICATION, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE.