real esate investment, legal settlement

[rbyu]

Hi,

 In 2020, Ex partner on an investment property tried to sue me for property title in 2020.  I won.   We settled in 2021 in mediation. I do expect a misc 1099 for 2021 by year-end. Question… Can I claim all my 2020 legal fees in 2021?  I am guessing I can claim all legal fees in 2021 once I get a misc-1099 from title company or whoever is responsible.  Can someone please let me know.

Thanks,

RB

[Carl]

I won. We settled in 2021 in mediation.

Technically, you did not win. There was no winner or loser. The matter was settled outside of court without a judges ruling, through mediation according to you. Just be aware of that.

Can I claim all my 2020 legal fees in 2021?

Probably not. But maybe. It depends on the circumstances and history. Was the property a business investment when acquired? Was a legal business entity established for this?

Generally, legal fees for personal property and/or personal disputes are not deductible. But like I said, it depends on the specifics of your situation. I suggest you seek legal counsel from a CPA, or better yet a tax attorney in your local jurisdiction, as laws on this may not only differ state to state, they can also differ among jurisdictions within a state. Generally, the IRS will accept the legal treatment of matters below the federal level; but not always and not on everything.

[Opus 17]

In general, legal fees you pay to obtain business income would be reported when paid, even if the income was not paid until later, or not at all.  For example, if you have a rental house and you sue a tenant, that would be a deductible expense when you pay the lawyer (or the court filing fees, etc.) even if you don't recover the missing rent until the next year.  (Your legal fees would generally be deductible even if you lose the case.).

"Investment property" can mean many things.  If you bought vacant land hoping you could sell it later for a big profit, then you have no ongoing income to deduct legal expenses against.  Your carrying expenses (like property taxes) would be miscellaneous itemized deductions subject to the 2% rule, except that was eliminated in the 2018 tax reform law.  You might be able to capitalize your expenses, except that the capitalization rules are tied up with the elimination of the miscellaneous itemized deduction and the effects are not clear.

I am also unclear on why you are receiving money.  Did you sell your interest to your partner?  That's a whole different kind of tax issue.  Legal fees to establish clear title in order to sell property are an adjustment to basis, not a deductible expense. 

Partnerships can certainly be more complicated, and up until the partnership was dissolved, you probably should have been filing a partnership return in most cases (and if you didn't, that might affect your tax position now).  

 I agree that professional advice specific to your case would be recommended. 

[TomD8]

This TT help reference may be useful to you:

https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/can-i-deduct-legal-fees-on-my-taxes/...

Note that "business-related" means a business that reports on Schedule C, E, or F.  (Exception: whistleblower and discrimination claims)

Also: you cannot deduct expenses incurred in 2020 on a 2021 return.

Non-business legal fees used to generally be deductible on Schedule A as a miscellaneous itemized deduction, but this was nixed by the 2017 tax reform law.   Thus, successful litigants are now generally taxed on the gross settlement amount without reduction for attorney fees.  

[rbyu]

I was hoping for a more direct answer, yes investment is for business, and it was a business dispute.  TBH, he lost the suit a judge order mediation to settle … He actually got the better part $$ house, but I am satisfied with smaller settlement just to end all ties..  

[Opus 17]

@rbyu 

You really haven’t given enough information, and this comment is more confusing than ever.  What is “he got the better part $$ house” supposed to mean?

In general, you can deduct settlement costs as a business expense if they arise from your business. If you want a more specific answer, we need to know a lot more about your situation.

What exactly was the nature of your business? How did you earn money, and how is it reported on prior tax returns? How long were you in business together? What exactly was the legal complaint for which you brought suit? How much did you pay in settlement costs and what did you get in return?

[Opus 17]

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@rbyu wrote:

I was hoping for a more direct answer, yes investment is for business, and it was a business dispute.  TBH, he lost the suit a judge order mediation to settle … He actually got the better part $$ house, but I am satisfied with smaller settlement just to end all ties..  

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Based on information you provided privately, you received money from the partnership in 2020, not 2021 (even though a 1099 hasn't been issued yet).  That makes it 2020 income.  Generally, if you sell an interest in a partnership for more than you originally invested, you have a capital gain, and if you sell for less than you originally invested, you have a capital loss.  

If this was a real estate venture reported on schedule E, you would include your legal fees as a deductible rental expense on your 2020 schedule E.  If you reported the business in some other way, I don't know how you would deduct your personal legal expenses related to a dispute between you and other members of the partnership.  Perhaps someone else has a suggestion, or you may need to seek a professional opinion.