Compensation

[Questionguy101]

Taxpayer sold a rental property a few years ago. In 2006, the buyer came back to the taxpayer (seller) and complained that something was not properly disclosed in the buy/sale agreement. Under the possibility of a lawsuit, the taxpayer (seller) settled with the buyer and agreed to pay him $5,000 as compensation.

Where can the taxpayer deduct the $5,000 compensation paid to the buyer (if it is deductible) in his 2006 income tax return?

[Roland Slugg]

After all those years?

Hmmmm .... As extortion? After the passage of several years, I question the seller's obligation to pay anything at all.

In any case since he did fork over five large, I'd treat it as a capital loss ... assuming the original sale yielded at least that much in capital gain. If the original sale produced a §1231 loss, then I'd treat this $5k as more of the same.

[S T]

Arbitration and Possibility of Law Suit

I don't know what state Questionguy101 is in, but I just had a t/p that had a similar scenario on the sale of his personal residence in 2003. Bottom line, settle for $30K in 2007 rather than go to court and be sued for $300K.

Unfortunately my t/p since it was personal residence, does not seem to be able to claim any type of loss under the Sect 121 rules. Well below the $500K exclusion.

Does not seem fair to the seller of the property if the disclosure laws of real estate were met, but seems like an extortion from the attorney representing the buyer years down the road. Has someone (attorney) found a loophole?

Where does the madness end!

Sandy

[Jiggers]

Settlement after the fact

I would deduct the amount paid on the same schedule as the original sale was reported. If it was on the 4797 part 1, 2 or 3, I would force the software to put this amount there.

I did that recently on a similar situation.

[Questionguy101]

Thank you for all the replies.