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Old 12-09-2013, 09:05 PM
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Tax on settlement for storm drain damage to house?

Around 2010 the city storm drain caused damage to my house, and in 2013 I received a settlement which is enough to partially pay for repairs. The city paid my attorney, who then deducted contingency fees, and then the attorney paid me the remaining amount for repairs. The settlement agreement with the city does not specify how the money is allocated (for damages, nuisance, etc.) I'll probably get a 1099 in January.

I am confused about what IRS forms I will need to fill out, since I always do my own taxes using TurboTax. I am pretty sure that the best tax treatment will be to offset this 1099 amount with the reduction in basis to the property, since the house has a lot more basis than the damages.

One of the IRS publications says that when the damage payment reduces the basis of the property, it is not considered income so it is not reported on the return. But that's where I am completely confused. If I receive a 1099, then the IRS will see a 1099 "income" source. How can I not report that according to the IRS guidance? There must be some other form I fill out somewhere to offset the 1099 "income" so that it is cancelled out as income and becomes a reduction in basis instead.



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Old 12-10-2013, 05:49 PM
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Originally Posted by ddpolarbear View Post

#1;Around 2010 the city storm drain caused damage to my house, and in 2013 I received a settlement which is enough to partially pay for repairs. The city paid my attorney, who then deducted contingency fees, and then the attorney paid me the remaining amount for repairs. The settlement agreement with the city does not specify how the money is allocated (for damages, nuisance, etc.) I'll probably get a 1099 in January.

I am confused about what IRS forms I will need to fill out, since I always do my own taxes using TurboTax. I am pretty sure that the best tax treatment will be to offset this 1099 amount with the reduction in basis to the property, since the house has a lot more basis than the damages.

#2;One of the IRS publications says that when the damage payment reduces the basis of the property, it is not considered income so it is not reported on the return. But that's where I am completely confused. If I receive a 1099, then the IRS will see a 1099 "income" source. How can I not report that according to the IRS guidance?


#3;There must be some other form I fill out somewhere to offset the 1099 "income" so that it is cancelled out as income and becomes a reduction in basis instead.
#1;Typically, money awarded to restore your property or reimburse you for a loss is not taxable and does not have to be reported as income on your taxes. If the proceeds are taxable, you will receive a 1099-MISC from the payer.

#2;it depends;the settlement can be taxable to the extent that it exceeds your losses. say, there was $20,000 in damages and you settled exactly for that, none of $20k would be taxable. This means unless you claim a casualty loss for the losses, it is not taxable. once you did, then the settlement would be taxable.


#3;you usually claim your losses on Sch A of 1040 as long as youitemize your deductions on your return.



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Old 12-11-2013, 06:56 PM
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Good info, thanks! For some reason, I am worried that the payer might fill out the 1099-MISC incorrectly or provide one (to be conservative) when a 1099 is not supposed to be provided. The nature of the settlement is for damage to property, which reduces the basis and is not taxable, according to IRS Publication 4345 which talks about tax guidance for legal settlements.

Now suppose that the payer issues a 1099 anyway, but it is not reportable income. Also I do not want to claim a casualty loss, because it is better to just allow it to lower the basis of the property and keep it non-taxable. If they end up issuing a 1099 anyway because they are being cautious.. should I put a note on the tax return somewhere to explain why the 1099 is not being included as income? Hopefully the payer will be savvy about taxation on legal settlements for loss of value to property and do this correctly, but I want to be prepared in case they erroneously issue a 1099.



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Old 12-11-2013, 08:07 PM
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Originally Posted by ddpolarbear View Post
Good info, thanks! For some reason, I am worried that the payer might fill out the 1099-MISC incorrectly or provide one (to be conservative) when a 1099 is not supposed to be provided. The nature of the settlement is for damage to property, which reduces the basis and is not taxable, according to IRS Publication 4345 which talks about tax guidance for legal settlements.

Now suppose that the payer issues a 1099 anyway, but it is not reportable income. Also I do not want to claim a casualty loss, because it is better to just allow it to lower the basis of the property and keep it non-taxable. If they end up issuing a 1099 anyway because they are being cautious.. should I put a note on the tax return somewhere to explain why the 1099 is not being included as income? Hopefully the payer will be savvy about taxation on legal settlements for loss of value to property and do this correctly, but I want to be prepared in case they erroneously issue a 1099.
In general as mentioned previously, storm damage to your home may allow you to take a tax deduction on your federal income tax. However, the IRS classifies the deduction as an itemized deductionon Sch A as long as you itemize deductions on your return.The greatest taxable amount should be the dollars received less the dollars you spent restoring your property. Actually, the fact that you received the 1099-Misc does not mean that this your taxable gain! Generally speaking, if you receive a reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft and vice versa. Your taxable gain if any is calculated as follows; The amount you receive (that is the insurance reimbursement), minus Loss sustained on the damaged pty. Thus, in many instances casualty losses are never fully deductible on your tax return. OR you can file without the 1099-MISC and expect a call from the IRS, to which you could demonstrate that it was not in fact income.. Your starting basis in your home must be reduced by the amount of any insurance or other payments you receive as the result of a casualty or theft loss.I guess you need to contact the IRS for more accurate info in detail.



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Old 12-12-2013, 03:11 AM
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Originally Posted by Wnhough View Post
In general as mentioned previously, storm damage to your home may allow you to take a tax deduction on your federal income tax. However, the IRS classifies the deduction as an itemized deductionon Sch A as long as you itemize deductions on your return.The greatest taxable amount should be the dollars received less the dollars you spent restoring your property. Actually, the fact that you received the 1099-Misc does not mean that this your taxable gain! Generally speaking, if you receive a reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft and vice versa. Your taxable gain if any is calculated as follows; The amount you receive (that is the insurance reimbursement), minus Loss sustained on the damaged pty. Thus, in many instances casualty losses are never fully deductible on your tax return. OR you can file without the 1099-MISC and expect a call from the IRS, to which you could demonstrate that it was not in fact income.. Your starting basis in your home must be reduced by the amount of any insurance or other payments you receive as the result of a casualty or theft loss.I guess you need to contact the IRS for more accurate info in detail.
That is a good description of one of the two routes, which is to take a casualty loss. But what I have in mind is the approach described in IRS Publication 4345 which is a special rule for settlements. In this approach the income is not even reportable (and not supposed to be entered as taxable income on the 1099) however it reduces the basis of the property. That is the context for my previous question about what to do if it is mistakenly entered as taxable income on the 1099.



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Old 02-01-2014, 08:17 PM
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Wow ddpolarbear, we have almost identical situation (city storm drain causes property damage 2011, we sue the city, and settle out of court for partial reimbursement of damage repair in 2013). I had to do a double-take since I could have almost written your query!!!

the only difference from your situation, is that in our case, the attorney fee was not contingency, but per hour rate.

The amount received was only to compensate for amount already paid for damages. so no punitive, pain/suffering, nada. just for property damage and I have receipts to prove that the amount I spent to repair the damage is far greater than the settlement amount.

In our case, we just got a 1099-MISC from my lawyer. but the settlement amount was reported in box 7.

All of the information I've read regarding this seems to point it should have been reported in box 3 if reported at all. (and from what I gather, it should not have been reported in 1099-MISC, but my lawyer insists that he must file it, so I can't get out of that)

my question is:
1. do I go back to my attorney and ask him to send a corrected 1099-MISC and put the amount in box 3 instead of box 7? what are the implications/consequence if the amount is left in box 7?

2. how do go about dealing with the fact that this "other income" is not a taxable income? Do I put any amount reported in 1040 line 21 or just leave it zero, and have some sort of explanation sent? or do I put the full amount in 1040 line 21 and then somehow deduct the full amount somewhere and explain it?



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