@tamtrinh wrote:
Question. I won a lemon law settlement of 45,000 ( $28,500 actual damage + $16,500 additional damage ( $30,000 x 55%) . It was on the check, $45,000. The attorney firm got $13,500 ($30,000 x 45%). I was able to KEEP the car. I originally bought the car for 28,500. What do I pay tax on?
My case was I KEPT the car.
Do I have to pay income tax on $45,000 or on $16,500 ?
Thank you
Please help me.
Thank you so much.
You treat this as the sale of your car under "sales of stock and other property." Your purchase price was $28,500, your selling price was $45,000. You pay capital gains tax on the difference ($16,500). If the owned the care for more than a year before the settlement, your capital gains is taxed as a long term capital gain at the lower rate.
Now at this point, because you kept the car, your adjusted cost basis is zero. That means that when you dispose of the car in the future, you may have another capital gain. For example, suppose you sell the car as a used car in 5 years for $10,000. You would normally consider that since you bought the car for $28,500 and sold it for $10,000, you have a loss. Losses on personal property are not deductible but you would not owe tax either. Here, if you sell as a used car for $10,000, you have a $10,000 gain because your adjusted cost basis is zero.
