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Domestic Relations Real Estate – Sale Proceeds – Like-Kind Exchange – Escrow Account

When husband and wife sold their rental property, Tallwood, wife agreed that $5,000 could be escrowed because of a dispute over payment for repairs to the property, but wife did not prove she otherwise would have qualified for a 1031 like-kind exchange for other property, and the trial court erred in awarding wife $12,084 in damages arising out of estimated capital gains taxes from sale of the rental property and $5,000 in attorney’s fees, the Court of Appeals says.

A 1031 exchange allows a taxpayer to defer recognition of capital gain or capital loss tax liability when a direct exchange of property between the taxpayer and another party takes place.

Here, wife was required to abrogate all control over the net sale proceeds until the exchange was completed. If the taxpayer actually or constructively receives money or property in the full amount of the consideration for the relinquished property before the taxpayer actually receives like-kind replacement property, the transaction will constitute a sale and not a deferred exchange, even though the taxpayer may ultimately receive like-kind replacement property.

The record reflects that when the parties sold the Tallwood property, $5,000 of the net sale proceeds were placed in escrow by agreement of the parties. Because wife’s entire portion of the net sale proceeds was not “earmarked” for use in purchasing a like-kind rental property, she was ineligible to complete a 1031 exchange.

We are mindful that wife agreed to place $5,000 of the net sale proceeds in escrow because husband refused to allow the sale of the Tallwood property to be completed without the escrow agreement. Nevertheless, wife agreed to the escrow. Also, under 1031, wife was required to identify like-kind replacement property within 45 days of the sale of the Tallwood property in a written document. Wife had 180 days from the sale of the Tallwood property to close on the replacement property. The record on appeal contains no evidence that wife met those requirements. We conclude the trial court erred in finding husband prevented wife from being eligible to complete a 1031 exchange.

Also, no record evidence exists to show wife actually suffered $12,084 in damages arising from capital gains tax liability from the sale of the Tallwood property, we conclude the trial court erred in finding that wife was entitled to damages resulting from her failure to qualify for a 1031 exchange.

Husband’s failure to comply with Rule 5A:20(e) is significant; his opening brief does not contain any principles of law or citation to legal authorities to support his asserted trial court error. We will not consider husband’s assertion that the trial court erred in denying husband’s motion to modify judgment.

We also reverse the trial court’s award of $5,000 in attorney’s fees to wife and remand for reconsideration, as we cannot ascertain what portion of the fee award was related to the 1031 exchange issue and what portion was related to its determination that husband caused wife “to take longer than necessary to present her case.”

Reversed in part, affirmed in part and remanded.

Cook v. Cross (Felton, J.) No. 0155-09-2, June 8, 2010; Albemarle County Cir.Ct. (Higgins) Michael K. .Cook, pro se; Ralph E. Main Jr. for appellee. VLW 010-7-221(UP), 8 pp.

VLW 010-7-221

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