A Horror Story

[S T]

Probably for 2007, but unsure.

I had a client contact me today, by email giving me a synopsis on a "law suit/arbitration" settlement.

To not bore anyone with all of the details, the long/short of the story is that they sold their personal residence in 8/03, (and supposedly had provided disclosure on any issues with the home) On 2003 tax return Sect 121 was applied , 2 out of 5 and no gain reported.

T/p and his ex-spouse (to complicate matters divorce in the interim) were sued (9/06) for issues with the house "MOLD". So under purchase/sale agreement went to arbitration. After several months of negotiating back and forth, Through arbitration the buyer and the seller (T/P) for this issue agreed on a settlement amount of $40,000.

I think I know the answer, but the question arose, is there any tax deduction for this settlement. I would think not, since the underlying asset was the personal home!

But thoughts would be appreciated!

Sandy

[jainen]

Yes there is

>>is there any tax deduction for this settlement<<

Yes there is. The taxpayers can treat it as a reduction in sales price, thereby realizing less capital gain.

[Skate1968]

primary residence

Janien,
If i'm reading Sandy's question correctly there was not taxable gain recognized because the asset was a primary residence.

Sandy,
I can't think of deduction for your client. I'm curious to see if anyone else has an idea.

[Snaggletooth]

$500,000 limit

Jainen's response is predictable, possibly.

In many parts of California, a $500,000 home is typical and not a luxury. For example, a sale of a home for $800,000 may indeed have a $500,000 profit.

[HBurkholder]

Read it again

This is all true however as I read the post I understood it to say "no gain reported" whch I assume means it came under the $500,000

[S T]

No Gain Reported

Sect 121 Exclusion, gain did not exceed the $500,000.

Tough one to explain to the client!

Sandy

[BOB W]

No....

.... additional deduction since 121 applied. They just made less of profit.

[jainen]

the bottom line

>>there was not taxable gain recognized<<

I never said there was gain recognized. Check my post--I said it was REALIZED. And that is exactly where the deduction can and should be taken, against the realized gain.

Whether or not realized gain is excluded under Section 121 is a different matter entirely. They may have exceeded the exclusion amount. Or it might have been small enough that they elect to not take the exclusion, saving it for another sale in the next two years.

Just make sure they don't double-dip. They can't deduct it AND exclude it. That's the bottom line.