Compensation for property taken away by the Romanian government

[aedoregon]

After at least 20 years of working with 3 different lawyers in Romania, the government agreed to compensate me for the inherited house in my home town!

The Romanian lawyer doesn't think I need to declare this as income, since it is a compensation for a property that did not give me income!

Will I have to declare this as income? Thanks

[Critter-3]

It is taxable if this was not your personal residence for 2 out of the last 5 years before the "sale" to get the profit excluded.   

Technically you "sold" the home to the government  so you will report the sale of the inherited home using the fair market value on the date of death for the basis... chances are good you will have a deductible loss after all the costs of the lawyers so it is in your best favor to report the sale... don't be worried.

[Opus 17]

It may be income in US, Romania or both.  If you pay taxes in both countries, you can claim a credit in the US for taxes paid in Romania.

I assume the house was seized by the government?  Regarding US tax law, did you ever take a tax deduction when the house was seized, like a casualty loss?  That will affect your outcome.

If you did not take a US tax deduction for the seizure, then I agree with @Critter-3 .  You treat this as if you "sold" your home.  When you sell your home, you pay capital gains tax on your gain, which is the difference between your cost basis and the selling price.  In this case, your cost basis is the fair market value on the day the previous owner died.  This would be taxed as a long term gain which has a lower tax rate than regular income. 

Note that under US laws, legal settlements for property damage are taxable if they are more than your loss.  For example, if a neighbor kid breaks your window and their parents pay you $200 but it only costs $150 to fix it, you have $50 of taxable income.  So even under that theory, your property settlement with the Romanian government is taxable to the extent it is more than your loss, and under US law your loss is the value of the home when you inherited it.