Lemon Law settlement TAXABLE ?

[tamtrinh]

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 tax on $45,000 or on $16,500 ? 

Please help me.

[MarilynG1 · Accepted solution]

Generally, any proceeds above the price you paid for the car are considered Capital Gains. 

Here's more info on Taxability of Settlements and How Capital Gains are Taxed, 

[tamtrinh]

Hi Marilyn, 

My case was I kept the car. The proceed was $45,000 ( the amount I got on my check), the price I paid was $28,500. Therefore the capital gain will be $16,500. Is it correct? 

Thank you.  

[MarilynG1]

Yes, that's correct.

Here's more discussion on Lemon Law Settlements. 

[tamtrinh]

Thank you so much. 

[scuracchio26]

Hi Marilyn

I have similar situation with a lemon law claim. I have settled with the manufacturer for a settlement of 17,000. The lawyers fee is minus 4000. So I'll get a check for about 13,000. 

I paid 62000 and change for the vehicle in 2023. 

I am keeping the car and not selling it. 

So does this mean that I subtract the 17,000 from 62,000? Or do I subtract it from what the fair market is now? I am still making payments on it. 

[Opus 17]

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@scuracchio26 wrote:

Hi Marilyn

I have similar situation with a lemon law claim. I have settled with the manufacturer for a settlement of 17,000. The lawyers fee is minus 4000. So I'll get a check for about 13,000. 

I paid 62000 and change for the vehicle in 2023. 

I am keeping the car and not selling it. 

So does this mean that I subtract the 17,000 from 62,000? Or do I subtract it from what the fair market is now? I am still making payments on it. 

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Your cost basis is what you paid for the car originally, $62,000.  (You can include sales tax and other legally required fees, but not costs associated with financing.)

The lemon law settlement reduces your cost basis by $17,000 (you ignore the attorney payment).  So your new adjusted cost basis is $45,000.

Cost basis is only important if you sell the car or otherwise dispose of it.  For example, if you sell it as a used car for more than your adjusted cost basis, that excess is considered a taxable capital gain.  That also applies to insurance settlements, if the car is totaled and the insurance company pays you more than your adjusted cost basis, the difference is taxable.   If you sell or otherwise dispose of the car for less than your adjusted cost basis, that is a loss, but losses on personal property are not deductible.