Lawsuit settlement

[Y2KEA]

TP received 1099MISC for $50,000 in box 3.
TP purchase principal residence & discovered it was not connected to a city sewer system as claimed. TP sued & settled out of court. I don't think the 1099 should have been issued. Can the TP show the income on line 21 & back it out with a reduction of basis to home.

[taxea]

TP received 1099MISC for $50,000 in box 3.
TP purchase principal residence & discovered it was not connected to a city sewer system as claimed. TP sued & settled out of court. I don't think the 1099 should have been issued. Can the TP show the income on line 21 & back it out with a reduction of basis to home.

what does IRS say about taxablity of this type of settlement? I think it is income and the expense of putting in the sewer line would be an increase to the basis of the asset, not a part of the tax return. I also don't think the 1099 was an error.

Lets say, for argument sake, that the price paid for the property included the fact that it allegedly was connected to the sewer and that amount of the purchase price was increased $50,000 because of the connection. The TP learned that the sewer was not attached and sued as a result because he felt he was out the money. The settlement of the suit was $50,000 would then be reimbursement or refund and not taxable because it would replace money spent (prior taxed funds). However, I doubt this was the case and the price paid for the property would have been the same with or without the hookup...in this case the settlement money is income (not taxed before) and should it be used to hook up to the sewer the cost would be an improvement, thus added to the basis of the asset.

[Gary2]

I wouldn't assume the price would have been the same, but $50K seems extreme. A local real estate appraiser, or possibly agent, could offer guidance on the impact on price of a private septic system (assuming that's what's there) versus municipal sewer. Depending on location, a septic system could be an advantage (if sewer rates are high) or a disadvantage (if the location calls for frequent maintenance or if it's unusual for the community).

But the obvious question is how did the settlement describe the payment? Punitive damages for false advertising? Compensation for capital?