Is an out-of-court settlement paid by seller to buyer after closing taxable as ordinary income or does it simply adjust the cost basis of the home?
We purchased a home and immediately found undisclosed structural problems effecting the material value of the home that led to considerable unanticipated expenses. After a couple of months of negotiation, we came to an agreement to settle and the Seller and Seller's agent paid us about half of the associated costs. Is this settlement considered an adjustment to the cost of the home (as it would have been if discovered and credited during escrow) or is it taxable ordinary income? Thanks for your insights.

Is an out-of-court settlement paid by seller to buyer after closing taxable as ordinary income or does it simply adjust the cost basis of the home?=========>>It simply increases the cost basis of the home and is NOT taxable.
We purchased a home and immediately found undisclosed structural problems effecting the material value of the home that led to considerable unanticipated expenses. After a couple of months of negotiation, we came to an agreement to settle and the Seller and Seller's agent paid us about half of the associated costs. Is this settlement considered an adjustment to the cost of the home (as it would have been if discovered and credited during escrow) or is it taxable ordinary income? ========>> In general, It doesn't matter if the money is from an out of court settlement or a civil judgment. What matters is if it is being paid for physical injury.The money for home damage that the buyer received after home closing costs are not taxable, but can be added to the basis of the home and reduce profit on the sale or other disposition of the residence when the buyer sells the home in the future.

Thank you, Wnhough,
That would be great.
Wouldn't the payment from Seller to Buyer then act to REDUCE the cost basis (effectively reducing the sale price) for purchase, and make any future gains LARGER? Thanks.