How do I deduct legal settlement and fees on an investment property that was sold 4 years ago?

[barton]

I am posing this question in two parts.  Otherwise, it gets too confusing.

I was a co-defendant in a law suit over an easement on undeveloped land.  The property is an investment property which I periodically logged.  There was a mediated cash settlement and substantial legal fees.  After a bit of research, it looks to me like both settlement and legal fees are deductible, either as an expense or capital expenditure.  My guess is on capital expenditure as all the income is capital gain.  First, is my guess right?  Second, what forms should handle?

The second part of my question is that the property was sold (with a capital gain) in 2014, suit filed in ’16 and settled in ’17.  How do I handle after-the-fact costs against the capital gain?  Filing an amended return doesn’t seem right, as it would reference a future event.  Reporting it on my 2017 return feels a little awkward because the settlement diminishes the capital value of a property I no longer own.

I appreciate any help, guidance or understanding anyone can offer.

[Opus 17]

You paid a settlement?  Or received a settlement?

[barton]

I paid

[Hal_Al]

Report it as a long term capital loss. Report it as the sale of land. The sale amount is zero and your cost basis is what you paid out, including legal fees. it's essentially  a 2nd transaction on the original sale.

[Opus 17 · Accepted solution]

If you had paid the settlement in 2014 before you sold the land, it would have been treated as part of the cost basis, thereby reducing your capital gain.  So at this point you report it as a capital loss transaction as Hal_Al indicates.  Enter it as the sale of sale that you bought whenever you bought the original property, price is the settlement amount, sale date is when you paid the settlement in 2017, sale price is zero.  This will create a capital loss.  If you have no other capital gains this year, the loss will carry forward until you do have a gain to offset.  

[Hal_Al]

If you have no offsetting capital gains, you will be able to deduct $3000, against other income, and the balance will be carried forward.

[SmokinViperGTS]

I have the same situation - I used my primary residence as a rental, recovered possession of it, and got sued in 2016.  I sold it in 2017.  And then entered a negotiated settlement in 2018 where I paid a lot of money.  I'm trying to follow your instructions, but the software won't allow me to enter a 0 profit sale in the section "Less Common Business Situations - Sale of Business Property - Sales of Business or Rental Property that you haven't already reported".  I put the original acquisition date of the property, then for Date Sold I put the date of settlement, sales price 0, and Cost (tax basis) as the amount of settlement plus attorney's fees, and 0 depreciation.  But then it says it did not make a gain, and wants to remove it.  This is the Home and Business version.  Please step me through the exact place to put this.  

[SmokinViperGTS]

I also tried going to "Personal - Investment Sales - Land - Rental" and it says don't report it in this section, but instead go to "Less Common Business Solutions - Sale of Business Property", and removes it.