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Legal fees and settlement for property I already sold years ago

Brief explanation of my situation:

  • In 2020 I sold a rental property.
  • In 2021 the buyer sued me for non-disclosure of a previous mold issue.  I hired an attorney to sue my real estate agent for not disclosing the mold issue.  I had told my real estate to disclose it.
  • In 2023 we finally settled.  The real estate agent paid $130,000 to me from which I paid the buyer $65,000.  So my portion of the settlement was $65,000.  My attorney fees were $75,000.
  • The real estate agent sent me a form 1099-NEC in the amount of $130,000.

My questions:

  1. Do I need to file a 1099-NEC in the amount of $65,000 and send to the buyer?  I don't have the buyer's SSN or address.
  2. How do I record this in TurboTax?  I received $130,000, paid the buyer $65,000, and paid my attorney $75,000.  I assume this would go into Schedule E but I already sold the property in 2020.
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1 Reply
DianeW777
Employee Tax Expert

Legal fees and settlement for property I already sold years ago

No, a Form 1099-NEC reports only nonemployee compensation which is not the case for your buyer. Because this is a settlement and not nonemployee compensation, it's best to issue a 1099-MISC to the buyer. Can you request the buyer's SSN and address from the attorney? If not, use the buyer attorney's address, and leave the SSN blank. There is a process on how to handle 1099s without a tax ID. Make a formal request for the number and keep it in your file for the IRS or send it with the 1099-MISC when you send the IRS copy.

You could issue a Form 1099-MISC to your attorney. Because this was post-sale, you are correct, it does not go on Schedule E.   Gross proceeds paid to an attorney in connection with legal services (but not for the attorney's services) are reported in box 10 of Form 1099-MISC. 

The Form 1099-NEC, you received, in and of itself is considered self employment income reported on Schedule C and this allows you to deduct the expenses you paid out.  It will cancel itself out this way but be prepared with all your documentation should the IRS want to check it out later.  You didn't actually earn any money yourself in this transaction.

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