Reporting a legal settlement loss on a rental property years after the sale of the property

[lgcphoto]

I paid a sum to the buyers due to a legal settlement this past year, but the house was sold to these buyers 3 years prior.  How should I report this settlement as a loss for this past year?  I no longer have been filing a Schedule E for this property.

[RobertB4444]

It depends on what the legal settlement was meant for.  Probably this amount would have increased the basis on the rental home that you sold so the way to take a credit for this is to amend the tax return from three years ago with the settlement added to the basis.  

That only works if the settlement was to cover something that would have been an improvement or repair to the house at the time of the sale.  If it was to cover anything else (legal fees, advertising, etc) then it is probably not deductible at all.

@lgcphoto 

[lgcphoto]

Thank you for that answer. I hadn’t even considered amending that return.  It was a settlement to cover the repairs needed to an undisclosed septic system.  So it would have been something we would have addressed prior to closing had we known it was an issue.  

Is there any possibility I could handle this on last year’s return or is amending the prior return really the only allowed approach?