Real Estate Agents Risk Lawsuits for Incorrect Tax Advice
Real estate agents should be careful about tax advice
Real estate agents should avoid advising their clients on tax issues or risk being forced to pay for debts the clients owe the Internal Revenue Service, a federal court ruled recently.
The U.S. District Court for the District of Columbia said a real estate broker who gave a client incorrect tax information could be sued for damages.
The ruling arose from the case of John Coon, a real estate investor who hired the real estate firm of City Houses D.C. in 2010 to help him sell an investment property. He wanted to use proceeds of the sale to purchase a new property.
They used a standard contract that included a provision saying the broker was hired solely as a real estate agent and not as a tax advisor. The contract also said the buyer and seller should seek appropriate professional advice concerning tax and insurance matters.
The client asked the broker whether he could structure the sale of one investment property and purchase of a second as a Starker Exchange. In other words, the exchange of properties would be designed to avoid taxable capital gains.
The broker told the client he could not arrange a Starker Exchange for the properties. As a result, the client incurred a $75,000 tax bill.
The client later discovered a Starker Exchange could have been possible in the deal. He sued the broker under a claim of negligent misrepresentation, breach of contract and breach of fiduciary duty. The broker filed a motion to dismiss the lawsuit.
The U.S. District Court dismissed the breach of contract and breach of fiduciary duty claims.
However, the court agreed the broker gave the client inaccurate information, which could be classified as negligent misrepresentation.
District of Columbia law says negligent misrepresentation claims require that a plaintiff reasonably rely upon a false statement or omission to his detriment.
The broker argued that his job as a real estate agent did not make him a tax expert. As a result, the client should have known his tax advice was not an expert opinion.
The judge disagreed, saying the broker’s previous experience structuring a Starker Exchange for the client made it reasonable for him to rely on the broker’s advice. The court ruled the client’s could sue for damages.
The case is Coon v. Wood, No. 13-1400 (BAH), 2014 WL 4647713 (D.D.C. Sept. 18, 2014).