Proceeds from a lawsuit

Forum|Forum|1 year ago
October 30, 2024
2 replies
6 views

Own Condo Bylaws provided if upstairs owner changes floor to hard surface from rug and pad notice must be given to downstairs owners affected before Board can approve. This was not done and sound transmission increased 4 fold per sound testing. Floor installed was with inferior soundproofing. Was forced to sue to compel correction or damages for diminished value of my unit and loss of quiet enjoyment. Sued Board, Manager and owner of above unit. After almost two years of litigation during which I incurred over $20K of attorney fees and expert fees, at last minute before trial insurers wanted to settle I wanted flooring and sound proofing of higher sound attenuation they ultimately agreed to settle for $30800.00 and I paid for flooring change in above unit and remainder was to recover back atty/expert fees and costs which produced net of $ 2000 for loss of quite enjoyment until upgraded flooring installed. No claim for loss of income or personal injuries or medical expenses. If the settling insurers issue a 1099 how do I report this as I do not consider it income which should be taxable. Can I offset cost or floor replacement in above unit and my costs in getting resolution?

tulipan

Level 5

Wow! This is a great question. In short, the answer depends upon how your settlement amount was allocated by your settlement agreement and whether and how the Form 1099 reports the proceeds.

Legal settlement payments are generally taxable, including any punitive settlement amount and interest, except for payments made to compensate for physical injury/sickness (and emotional distress or mental anguish if directly related to a physical injury/sickness). In other words, settlements for non-physical injuries/sicknesses are normally taxable.

Using the IRS guidance, all income from whatever source is included in gross income unless a specific exception exists. The most common exceptions regarding settlements are those noted above. You may want to consider this IRS resource to guide you on the tax implications of your settlement: IRS: Tax implications of settlements and judgments and IRS: Settlements -- Taxability.

In most instances, the attorney’s fees from an otherwise taxable settlement can’t be deducted. Please see this TurboTax article: Can I Deduct Legal Fees on My Taxes?

I appreciate that this may not be the answer you were hoping for, but I hope it’s nevertheless helpful to you.

EleanoreS

Employee Tax Expert

Good day. I am sorry you had a long path to resolve the sound issue in your condo.

Per the IRS, settlements for the loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return. However, you must reduce your basis in the property by the amount of the settlement. IRS Publication 4345 covers all types of settlements and the tax ramifications.

If you believe the settlement falls into the category of loss in value of property and you receive a form 1099, I would suggest that you contact the settling issuers and request that the 1099 be adjusted.

Thank you for joining us at the Ask the Expert event today!

Sabetaytax68Author

Level 2

Thank you for response. Settlement specified only that I would be paid $30,800, out of which I had to pay about $11,000.00 to take out flooring and inadequate sound proofing installed in unit above me and to install better grade flooring and improved sound proofing limiting sound transmission and continuing diminution of value to my property due to excess sound transmission resulting from change to hard surface flooring without prior required notice to me and the remainder for general damages for loss of use and quiet enjoyment for two years since installation without prior notice to me. In my mind I agreed to settlement because it remedied problem reducing sound transmission, and general damages covered what it had cost me to mostly get back to where I had been before as to level of sound transmission which was about $2000.000 in out of pocket expert fees, court costs and legal fees, with a little (almost nothing for loss of quiet enjoyment) while sound impacts continued until floor and sound proofing replacement. I was not looking to get rich only to be returned to status quo before Rules and Regulations of HOA were breached by changing flooring in upper unity without prior notice to me. Had I been given appropriate notice I would have reviewed proposed changes and insisted upon appropriate sound proofing or would have gone to court to seek a restraining order preventing Board Approval but that was not possible as I did not recieive required advance notice.

I will just wait to late February to see if I get any 1099 from settling parties’ insurance companies but if I do will be seeking Turbo Tax expert help in filing necessary forms so as not to be taxed on recovery which would add insult to past injury.

Sabetaytax68Author

Level 2

Correction to above costs to get back to status quo before violation of Rules and Regulations for prior notice to were about $20,000 for expert fees, court costs, and attorney fees event though those amounts were not specified in lump sum settlement amount with only amount specified was that I had to pay out of gross settlement about $11,000 directly to contractor to take out flooring originally installed without prior notice and install better grade of flooring with superior soundproofing to remedy continuing general damages and loss of quiet enjoyment.