1099-MISC Lawsuit Income all used to repair home

[Joker]

In 2017 I had a roof damaged that was refused to be paid for the insurance company.  I sued them and won a settlement but that settlement didn't even cover the cost to replace the roof.  I received around 13k from the lawsuit but the cost to repair the roof was 15k

I now have a 1099-MISC from the attorney stating the lawsuit amount.

Do I have to report this as income when all proceeds when to repair my roof plus I was actually out even more money because the insurance company acted in bad faith and didn't pay out the repair.

[IsabellaG]

This settlement wouldn't be taxable to you, because the amount received doesn't exceed your basis in the roof ($15K) See this IRS discussion, under Loss-in-value-of-property If you don't report it, however, you will most likely be contacted by the IRS, and you will need to show your documentation concerning the nature of the settlement and the cost to replace your roof.

You could also report the 1099-MISC, then make a negative entry under Less Common Income  (Miscellaneous Income) which would zero out the $13K and yet still report the 1099-MISC for when this income gets matched to your return.

Also, the lawsuit proceeds will reduce your cost basis in the roof for when you sell the property.

[Joker]

Isabella what if I sold the property in 2018?  I didn't sell the property for profit over 250k.  I actually barely broke even.  I Posted what I thought on the sale of my home and believe that applies.

"If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free."

The home had to have the roof repaired so I could sell it because it would not have passed any type of inspection is what I was told by the realtor.

More info:

I purchase the home for $199,000 and sold it for $236,000.  I owed almost that much due to 2nd mortgage and other improvements in the property.

So when I report the negative income do I report the lawsuit settlement amount or do I report the cost of the loss of property amount that it took to have the roof replaced?  

I was going to put this in the description line:
Settlements: Loss of Property Publication 4345: Roof Replacement cost

Is that sufficient? 

[IsabellaG]

Your basis in the house would be what you paid for it plus the cost of any improvements you made to the property. This would include the cost of the roof, but you'd have to subtract the lawsuit proceeds. Then when you sell the house, if you qualify, you can exclude up to $250,000 gain on the sale. 

So if you paid $199,000 for the house, and fixed the roof for $15000, and got back $13000 from the lawsuit, your cost basis is $199,000 + $15,000 - $13000, or $201,000. The amount of your mortgage doesn't have anything to do with it, but you would add other improvements. Your gain would be $236,000 - $201,000, or $35,000, which you can exclude if you qualify.

Report the Lawsuit settlement in the 1099-MISC section.

Then the negative amount (the same $13000) in the  Less Common Income  (Miscellaneous Income) section of TurboTax, at the bottom of the income section. Enter -13000. That will zero out your settlement so you won't pay tax on it, but treat the sale of the house the way I explained above. The description you  mention is fine.