We live in and own a home jointly with my in-laws.
When a development was put in next to and behind our home, the house
sustained damage due to the vibrations during the grading phase.
In addition, my mother-in-law had a stroke -- attributed to the
settled with the grading company for $20,000.
released the company from all liability and specific damages were not named. The
check was in the names of all four of us (my husband, myself and my in-laws).
We will be dividing up the money among ourselves based on the relative damage
to each side of the home, taking into consideration what my mother-in-law suffered,
so we will not be dividing it up equally among ourselves. Is the entire settlement
taxable, and how much does each couple claim as income for tax purposes?
forward to your reply. Your archives are very useful and I appreciate your service
to the public.
Thanks for the compliment, and I'm glad to hear
that you've browsed the archives. But always remember that the tax
laws are changing and that the answers in archived articles are
not updated for law changes.
The taxation of settlements is
based on the claim that led to the settlement. Presumably, in order
to receive the settlement, you or your attorney had to make a claim
with the grading company. If the claim specified that you were seeking
compensation for damage sustained by your home, then the settlement
is considered to be for property damage.
A settlement for property damage is generally not
taxable, but instead would reduce your cost basis of the property.
For example, in your case, let's assume your house cost you $200,000.
Since the $20,000 you received does not exceed your cost, you did
not have a gain, so the cost of your property is reduced to $180,000.
Presumably, you will have to make repairs to the home to repair
the damage caused by the development next door. These repairs will
be added to your cost, but it does not change your tax situation
if you do not spend the full $20,000.
If your claim to the grading company sought compensation
for the stroke your mother-in-law sustained, then the part that
you allocate to her for compensation would not be taxable to her
and would not reduce your cost or their cost in the home. Compensation
for physical injuries is never taxable. For example, assume you
give your mother-in-law $5,000 for her suffering, then you would
only reduce the cost in the home by $15,000, and the additional
$5,000 would be without tax consequence to her.
somehow the settlement exceeded your cost in the property, then you would need
to consult a tax adviser.