Q: I owned a condo rental property in Washington D.C. I held onto the condo after I moved to California, hoping that someday I would be able use it to help me buy a home here.

I sold the condo in August and then in October 2006, I used the money from the sale to purchase a home in Sacramento. But it all fell apart today when I picked up my tax returns and found out that I owe $54,587 in taxes.

I’m not a total idiot — I expected I would owe a few thousand dollars, but not almost an entire year’s salary.

So somebody asked why I didn’t do a 1031 exchange. I had no idea what they were talking about. I suppose I should have read the tax code so I would be up to date on this kind of thing. But I thought this is the sort of thing I expected my listing Realtor to caution me about.

The main reason I use Realtors is because they are supposed to be experts in their field. Apparently, I was wrong because, in the eight month process of selling and buying not one of the four Realtors involved, or anyone from the lender or the title company ever mentioned a 1031 exchange or told me I was headed into tax suicide.

So now that I am staring bankruptcy in the face and will probably lose my home, I have two questions: Is there anyway to salvage this situation? And, am I wrong to have assumed that my listing agent at least, should have raised a red flag about selling a rental property outside of a 1031 exchange?

A: Yes, you’re wrong to assume that your Realtor would (a) have this knowledge and (b) would know enough about your plans to know to suggest it to you.

Your real estate agent is presumably an expert in selling houses, not minimizing your tax liabilities. It sounds like she did the job you hired her to do, which is sell your rental condo.

But unless your Realtor is also a financial planner, accountant or an attorney, you should have hired a real estate attorney and talked to the attorney and your accountant about your plans. These are the experts who could have advised you as to your financial options, and explained what you had to do in order to defer capital gains tax.

You could have also gone to the IRS.gov website and looked up the tax liabilities for selling rental properties. You’d have wanted to see IRS Publication 527 “Residential Rental Property,” and IRS Publication 544 “Sale of Rental Property.” Both of these explain potential tax liabilities.

Tax free exchanges have very specific time deadlines. You would have had to identify the replacement property within 45 days of closing on your old property and then closed on the deal within 180 days. It appears you would have met these deadlines, if you sold in August and bought in October.

But you could not use your 1031 to sell a rental condo and use the cash to buy your primary residence. You’d have had to buy a single family house and rent it out for 3 years before moving into it as your primary residence. Still, you wouldn’t have had a $55,000 tax liability.

It is unfortunate that you didn’t spend some time and money learning how to protect yourself financially.

My best suggestion for you is to talk to a financial planner, accountant or bankruptcy attorney to see what options you have.

April 29, 2007.