Last year we had to go to arbitration over our house we bought. He lied about work done on our purchase agreement. We won a small sum, is that taxable?

[sweetsong60]

We bought our house over a year ago, once we moved in we realized a lot of things that were stated int he purchase agreement were not done or done incorrectly.  The seller lied on the purchase agreement and then gave us fraudulent receipts which violated our agreement.  Anyways we bout the house thinking things were up to code and professionals did the work so we payed the amount he listed the house for and later found out it was not done.  We we went to arbitration with our evidence and he ruled in our favor.  We were awarded a small sum to help us repair the damages.  Is this award taxable?  We payed a higher price on the house thinking these things were done but were deceived by the seller.  The amount was under 10,000.  I've been trying to find a straight answer online and haven't.  It sounds like if the award is under the amount you bought the house for (which it is well under) then it's not looked at as taxable income.  Please help me answer this.

[MinhT]

This settlement is for loss-in-value of your property. If the settlement is equal or less than the loss in value (the adjusted basis of your loss), then it is not taxable and  you do not need to report the settlement on your tax return. But you must reduce the cost basis of your property by the amount of the settlement.

In your case, if the settlement is just enough to repair the damages, it is not taxable and you do not have report it. If you then use the money to pay for the repairs, you can add it back to your cost basis.

If the settlement is more than your loss-in-value, the excess must be reported as income.

For more information, please read this IRS document:

https://www.irs.gov/pub/irs-pdf/p4345.pdf