Do I need to pay taxes on a settlement I received from my home owners title insurance? I agreed to give up land disputed by my neighbor for money. If so how to calculate?

[Opus 17 · Accepted solution]

If you were paid to give up your claim on some land, this would technically be a sale of the land.  There would be no tax owed if you report it correctly, but the easier thing to do is simply treat it as a reduction in the cost basis of the rest of your property, which may increase your capital gains later when you sell.

For example, if the home cost $100,000, and you received $10,000 over the dispute, then you would consider that your home purchase price was actually $90,000 and use that figure to report any gains when you sell.

If you get a 1099-S, you would need to report it as a sale of an asset.  Use "something else" and not "your home" in the asset type.  Report the amount of money received as both the purchase price and sales price.  You would still reduce your cost basis on the rest of your home. 

Keep all your documents as long as you own the home plus 6 years after.