Mediation after house sale

[Amy108]

My husband and I sold our home. This sale amount didn't qualify for capital gains tax. There were some issues with the sale, and we went to mediation where we were awarded $18,000.00. This amount added to the amount of the sale still does not qualify for capital gains tax.

We received a 1099 MISC from our attorney, but it appears we should not be taxed on this amount due to not meeting the capital gains amount. Does anyone have input on how this should be addressed on our taxes? Thank you for your time.

[MonikaK1]

Please clarify: 

• Was the house sold as part of a divorce property settlement? 
• Was your return audited? 
• What type of Mediation was involved?
• What were the terms of the settlement?
• What does the $18,000 represent?
• Why don't the sale proceeds "qualify for the capital gains tax"? Do you mean that you qualified to exclude the gain on the sale from income?

[Mike9241]

you'll need to enter the 1099 as the income

then use the jump box to get to the other income form where on line 12 enter a description and enter a  -18,000

[MonikaK1]

The instructions provided by @Mike9241 show how to report and then back out the amount on a Form 1099 that isn't taxable to you. However, without the answers to the questions I posted, it isn't clear whether the income is taxable. 

If the terms of the mediated settlement were that the buyer of your home should pay an additional $18,000 for the home, and your revised total gain on the sale (sales price less your basis) qualified for exclusion from capital gains, then you can exclude the amount. If any of the settlement proceeds represented punitive damages, they would be taxable.

See this TurboTax help article for more information about determining whether the gain on the sale of a residence is taxable.

See this IRS article for more information about the tax treatment of lawsuit settlements.

@Amy108 

[Amy108]

We had a first buyer back out on closing day. By this time we had incurred a loss in value as proven when the house sold to another buyer at a later date. We did not sue the initial buyers but went into voluntary mediation at which time they settled for $18k to cover the lost value in our home sale. The house was our only home and the amount falls under the cap for exclusion for taxes. I would think that the settlement simply made us whole on the house sale and should still fall under the exclusion. Our attorney issued a 1099 for the settlement. not sure if I am understanding this correctly, thank you for your help.

[Amy108]

We had a first buyer back out on closing day. By this time we had incurred a loss in value as proven when the house sold to another buyer at a later date. We did not sue the initial buyers but went into voluntary mediation at which time they settled for $18k to cover the lost value in our home sale. The house was our only home and the amount falls under the cap for exclusion for taxes. I would think that the settlement simply made us whole on the house sale and should still fall under the exclusion. Our attorney issued a 1099 for the settlement. not sure if I am understanding this correctly, thank you for your help.

[KrisD15]

The settlement is taxable and does not relate to your sale of home. 

This is entered as "Other Income" subject to Federal and State tax but not Self-Employment (FICA) tax.

I am not an Attorney and cannot give legal advice, but it sounds like the award is for "Punitive Damage" because they tied up the house and the closing did not go through. You did not sell them anything. There is no capital gain or loss.

Enter as

Other Common Income

Income from 1099-MISC

be sure to select that it was not like your job, not for intent to make money and only received in 2023 so the program does not treat it as Self-Employment. 

HERE is a link to a similar answer