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.