You can deduct expenses of resolving tax issues relating to profit or loss from business reported on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), from rentals or royalties reported on Schedule E (Form 1040), Supplemental Income, and Loss, or from farm income and expenses reported on Schedule F (Form 1040)
Page 5 Legal Expenses IRS Publication 529, Miscellaneous Deduction
- In general, legal fees that are related to your business, including rental properties, can be deductions. This is true even if you didn't win the legal case in which the legal fees were incurred.
- You can not claim the capital loss until the litigation is finished. A down payment is not an expense used in operating the property. The down payment is equity in the property.
- When a party involved in a lawsuit makes a payment pursuant to a judgment or binding settlement agreement, the payment may be included in the recipient's income and may be deductible from the payor's income. Therefore, you will not have to capitalize any of it. The amount returned would be a return of capital, and a loss would be a capital loss.
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