Taxability of Settlement

[Jeff]

Client purchased their personal residence in 2004 for 1,000,000. Transaction consisted of the following:

 100,000 down payment
 100.000 2nd carried by the seller
 800,000 1st carried by the bank

Shortly after making the purchase client discovered numerous defects in the property not revealed by the seller in accordance with California law. Client hired an attorney and began negotiations with the seller in regard to damages. Seller subsequently settled by agreeing to reduce the original sales price by 250,000. This was accomplished as follows:

 Seller cancelled 100,000 2nd trust deed
 Seller made a 150,000 principal reduction payment directly to the bank holding the 1st trust deed

In addition, the seller agreed to pay $15000 in legal fees directly to my client’s attorney.

Is the 250000 settlement taxable income or does it merely reduce my clients basis in their home?

Is the $15000 payment to my client’s attorney taxable, if so, would it be deductible as a misc itemized deduction.

Thanks in advance for your thoughts on this matter.

Jeff

[Bill Tubbs]

Rebate on purchase price

Assuming no business use of the residence, the $250,000 would be a rebate on the purchase price -- i.e. reduces the basis of the residence.

The $15,000 would be a reimbursement of legal fees -- no taxable impact.

Bill

[jainen]

share his name

You mean to say there is a California attorney who only charges 6% on a quarter million dollar settlement? Please share his name!