Redhibition Claim and Taxes

[jpnadere]

Hello! I currently have an outstanding suit with GM for a vehicle I purchased that has had various issues. In Louisiana we have redhibtion, which basically states an item purchased for a certain amount, would not have been sold for that amount if the defects were known to the purchaser. My attorney and I have sent an offer for $16,000, which he believes is a fair offer. From what I’ve read, this would not be considered taxable income, as it would essentially be a refund for funds already spent. I will also

not receive a 1099 per my layer. Am I correct in thinking this? Thanks!

[Opus 17 · Accepted solution]

Generally, yes.  However, the payment reduces your cost basis in the vehicle.  This has implications if you later sell it.  For example, if the car cost $40,000, and you later sell it, you would have a non-deductible loss if you receive less than $40,000 and you have a taxable capital gain if you receive more than $40,000.  (As you can imagine, this situation is not common for personal vehicles.)

However, the payment would reduce your cost basis to $24,000.  So if you sold the used car for more than $24,000, the difference is taxable capital gain.  The payment reduces your adjusted cost. 

[jpnadere]

Thanks for the response! Today we officially settled for $20,000 and after the attorney fees & other expenses I will net around $13,000. I purchased the truck for $55,00, so now my cost basis is $42,0000 I'm assuming. 

So let's say I trade in the vehicle in a year and get $50,000, would I still have a capital gain to report even though I did not receive any income? Or is that only if I personally sell the vehicle? 

[Opus 17]

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@jpnadere wrote:

Thanks for the response! Today we officially settled for $20,000 and after the attorney fees & other expenses I will net around $13,000. I purchased the truck for $55,00, so now my cost basis is $42,0000 I'm assuming. 

So let's say I trade in the vehicle in a year and get $50,000, would I still have a capital gain to report even though I did not receive any income? Or is that only if I personally sell the vehicle? 

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Yes, your adjusted basis is $42,000.  While personal legal fees are no longer tax deductible, it is still allowed as an adjustment to basis when you pay legal fees for the acquisition of capital property.

The capital gains applies to both trade-ins and actual sales.  As long as you "realize" a gain (make it into a tangible value to you rather than a theoretical value) you owe the capital gains tax.  But, as long as you owned the truck for more than one year overall (not since the settlement, but overall), the capital gain is taxed at the lower long term capital gains rates.