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Accounting for contractor theft and damage to property

Hi all, Thanks in advance for your help, as this is a tad tricky. We have a commercial property that we contracted to renovate. The contractor started the work but ended up stealing most of the deposit (say $X). On top of that, the contractor damaged the property in the amount $Y. We settled (with lawyers involved, etc.) where the contractor admitted (signed and all) to taking $X and doing $Y of damages. We got a settlement agreement where the contractor will be repaying a little less than ($X + $Y) in monthly installments over 3 years in exchange with us not filing with their insurance, bond, or state agency overseeing construction.  The nuance here is that the agreement stipulates that damages will be covered first and then theft of the deposits second (different statutes of limitation) so in theory we have:

1) Damages being paid off in year 1 (2024)

2) Return of embezzled money being paid off in years 2 and 3 (2025 and 2026)

 

Questions:

1) If contractor fails to pay - do damages get added cost basis of the commercial property (and reduced by whatever the insurance will pay out?). 

2) Since we are not getting paid stolen funds in year 1, do I file for 4684 indicating $X of funds that were stolen for 2024 and then file showing gains on 4684 in 2025 and 2026 (assuming contractor actually pays)? 

 

Thanks much!

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