Do I pay taxes on Rocky Flats Settlement Funds when I sold my property in 1996 and rolled the gain into a new, more expensive house? Income or capital gains?

[patknapp57]

Since the original gain on the property was rolled over into a new property in 1996, why should this money be taxed as income or capital gain? If I had received a sales price that included the additional amount that I lost because of the proximity of Rocky Flats, it would have been included in the  money that was rolled into the new property under the IRS rules at the time. The "canned" answer that I keep receiving from you does not seem to apply to my situation! I think I am supposed to be able to call a tax expert as part of my purchase of Premier TurboTax, but I cannot find a telephone number anywhere.

[Anita01 · Accepted solution]

You are correct that you would have rolled this amount into your gain when you sold.  That's why you reduce the cost basis on it, to increase the gain you would have rolled over.  When you sell the newer, bigger house, you would reduce your basis by any amount you rolled over prior to owning this house, and that gain would now include the settlement amount.  You will pay tax on it just like you would on the rolled over gain amount prior to the settlement, if your total gain now exceeds the exemption for $250,000 for a single person or $500,000 for a married joint filing.