Legal Question in Real Estate Law in California
Cancellation of 1031 exchange
I cancelled a 1031 exchange when I had learned that it was not necessary to do so with the rental property we sold. The transferor filled out a 2003 Form 597 (Real Estate Withholding Tax Statement) and withheld almost $21,000 that was sent to CA FTB without first notifying me and my wife. However, there was a loss in the sale of the rental property we owned so Form 593C (Real Estate Withholding Certificate) & Form 594L (Real Estate Witholding - Gain or Loss) should have been filled out so that payment would not have been made. This was pointed out to us by our tax agent. Those funds would have been used to close another property we purchased in southern CA. As a result of the transferor's mistake we were forced to withdraw money from a stock-IRA to close the deal in southern CA which resulted in penalties for early withdrawal. I believe the transferor is liable for paying the penalties because of their mistake. Is there a part of the law which relieves the transferor from such liability or can I proceed with a lawsuit for the maximum amount allowed in Small Claims Court?
2 Answers from Attorneys
Re: Cancellation of 1031 exchange
How did you cancel the 1031? Did it just expire? Did they have notice that you were doing a 1031 transfer presumably to the Southern CA property? If so, you may have a claim for the penalties. You may contact me.
Re: Cancellation of 1031 exchange
In any action for damages, whether based on breach of contract or on a tort such as negligence, there is some limitation on what the plaintiff can allege and collect as damages.
The cutoff is dependent upon the relatedness and foreseeability of the items of damage claimed.
Clearly, if there is an over-withholding due to breach of contract or professional negligence, the over-withheld funds themselves can be recovered, and almost as clearly, legal interest on those funds.
However, as you move toward asserting downstream or consequential damages, it becomes increasingly more difficult to establish your entitlement to recover those damages. For example, if you had to fly to Southern California and stay overnight to arrange alternate funds because of the breach or negligence, can you successfully sue for those travel expenses as well? It's very doubtful.
The rules as to what "damages" are recoverable involve very complex rules of "proximate cause" and foreseeability. This is one of the more abstract and theoretical areas of law.
I cannot predict what a small-claims judge would grant you; they're notoriously unpredictable. My guess, however, is that the IRA-withdrawal penalties would NOT be awarded as damages in this instance.
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