Forbes has published an article, “IRS Taxes Legal Settlements, But Some Are Capital Gain,” which discusses the hidden taxes in lawsuit settlement agreement. The article begins as follows:
The IRS taxes most lawsuit settlements, and exact wording matters if you are trying to avoid that grim result. However, a suit about intellectual property might produce capital gain when it settles. So might a case about a landlord tenant dispute, where the tenant is bought out of a lease. A suit about damage to or conversion of property? That might be capital gain too. So might a suit about construction defects, harm to property or diminution in its value. How about a suit against an investment adviser for losing your money? There too, capital gain is a possibility, or even basis recovery. You might be getting your own money back with nothing taxable. Even a lemon law suit about a defective vehicle can produce capital gain or basis recovery. Of course, as you might expect, the IRS can and does push back, but all of these examples can represent legitimate opportunities for capital gain rather than ordinary income. It’ one of the IRS rules about legal settlements and legal fees.
Click here to see full article: “IRS Taxes Legal Settlements, But Some Are Capital Gain.”
Posted by Bella Hoang, Managing Associate Editor, Wealth Strategies Journal.