legal fee added to basis ?

[taxmom34]

my sister owns a house she is renting and wanted to sell it this year. however, there was a crooked contractor who put a lien on the house about 4 years ago, so, she had to hire a lawyer and go to court (yesterday) to lift the lien. court ruled in her favor, so now, how do i handle the legal fees associated with this. i had planned on just adding it to the expense of sale, but she is not sure she will be able to sell before the end of the year, home sales down and banks won't loan out money. so if she doesn't sell, i imagine i would add legal fees to the basis, depreciate? how many years?

[ChEAr$]

my sister owns a house she is renting and wanted to sell it this year. however, there was a crooked contractor who put a lien on the house about 4 years ago, so, she had to hire a lawyer and go to court (yesterday) to lift the lien. court ruled in her favor, so now, how do i handle the legal fees associated with this. i had planned on just adding it to the expense of sale, but she is not sure she will be able to sell before the end of the year, home sales down and banks won't loan out money. so if she doesn't sell, i imagine i would add legal fees to the basis, depreciate? how many years?

Is this still rental property and actively rented right now?

[taxmom34]

Is this still rental property and actively rented right now?

yes, it is.

[ChEAr$]

yes, it is.

Then it follows that the expenditure for legal fees was to maintain the property in a rentable
condition. Expense it, and, as a friend of mine says, "ride out of Dodge."

[Davc]

Disagree. Cost to "perfect a title" are added to basis.

[taxmom34]

expense it?

if it was a small amount , i would have considered it. but to date she has paid lawyer over $6000 and not done, yet. still have another hearing in september

[ChEAr$]

Disagree. Cost to "perfect a title" are added to basis.

It has nothing to do with perfecting a title, since she already owns the house. this lien
action occurred after perfecting the title and relates to moneys owed.

[Davc]

Perfecting a title is for property you own. And there is nothing in the OP that indicates the lien has anything to do with the rental activity.

[New York Enrolled Agent]

FWIW

Reg 1.212-1(k)

(k) Expenses paid or incurred in DEFENDING or perfecting title to property, in recovering property (other than investment property and amounts of income which, if and when recovered, must be included in gross income), or in developing or improving property, constitute a part of the cost of the property and are not deductible expenses. Attorneys' fees paid in a suit to quiet title to lands are not deductible; but if the suit is also to collect accrued rents thereon, that portion of such fees is deductible which is properly allocable to the services rendered in collecting such rents. Expenses paid or incurred in protecting or asserting one's right to property of a decedent as heir or legatee, or as beneficiary under a testamentary trust, are not deductible.

[Gretel]

Great info, NYEA. The regulations talk about expenses only.

Do you know what happens if the land in question is actually never owned by TP? Does he than have a capital loss?

Same true for beneficiaries who don't win and are forced to sell property to contestant to a much lower price than FMV?