I purchased a primary residence and the next day found out that had some foundation issue that were not disclosed. After two year, the seller accepted to go to mediation. The cost to repair the problem is $133,000. I have several thousand in attorney fees, I settled for $40,000. In my mind (40-10 attorney), I only get $30,000.
The questions is...Do I have a loss or a capital gain? If is a taxable income it it tax as ordinary or at a different rate.
Can it be deducted as a loss?
$40000 received from the seller is towards reduction in cost to repair the foundation issue. So $40000 is not capital gains but will be reduced from the cost of the repair that will be capitalised. There is no loss or capital gain. Capital gain will arise when the residence is actually sold to a buyer after repair. In this case, the difference between the cost of the residence (which will include cost in excess of $40000 paid to repair the foundation issue) and the sale price of the residence will be capital gains. Thus only on actual sale of residence, capital gains will arise. $40000 is for cost of repair not done on purchase of residence and hence not taxable.
I purchased a primary residence and the next day found out that had some foundation issue...
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