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Question

2

Taxpayer with his own funds bought a building 40 years ago that was titled in his father’s name. During that time until present, Taxpayer was operating a doctor’s office as a sole proprietorship out of that building. Despite all indicia of ownership, Taxpayer never took title.

Taxpayer’s father died 25 years ago and left all his property to his wife. During this time, Taxpayer continued to operate a doctor’s office out of the building. Years later, the Taxpayer’s mother died and her will left all of her property to be shared amongst the children (Taxpayer and Brother) equally. Brother of Taxpayer decided to file suit for the property.

The taxpayer decided to settle and pay a lump sum settlement of $100,000.00 dollars to Brother. The settlement discusses an agreement arising out of the Estate of Taxpayer’s mother between Taxpayer, individually, (he was operating a sole proprietorship), and Brother. Taxpayer took out a home equity loan (against his personal residence) to pay for the settlement.

Would the settlement be a deductible expense on the taxpayer’s 1040?

flag	asked Mar 6 at 19:41 Todd Unger Esq. 49●4

Stephen Ashby CPA · Answer 1 · 2010-03-06 20:59:02Z UTC

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If I understand the facts correctly and the taxpayer inherits half from his mother and is getting his brothers half interest in the property for a payment of $100K, then no it would not be deductible. It would increase the the taxpayer's basis in the property which would probably now be equal to half the fair market value of the property at the mother date of death, plus the $100k he paid his brother.

answered Mar 6 at 20:59

Stephen Ashby CPA
483●4

	Thanks for the response. Can the settlement be considered an ordinary and necessary business expense because the Taxpayer was utilizing the building as his principal office to conduct his business as a doctor? – Todd Unger Esq. Mar 6 at 21:24
	Technically, no. Purchase of a building used for business is a "capital" expenditure, not an "expense". However, the subsequent depreciation is an expense for tax purposes. – stephenweinstein Mar 6 at 22:08
	The Taxpayer is now deceased and I am preparing his final tax return. I was hoping to be able to deduct the settlement against his income. Are there ways to fully depreciate his cost all at once, considering it's the Taxpayer's final return, or are you limited to a scheduled deduction on the 1040 and 1041? – Todd Unger Esq. Mar 6 at 23:48
	Regular depreciation only for commercial property over 39.5 years. There are no bonus depreciation provisions for real property, such as the Section 179 election used for personal property. – Stephen Ashby CPA Mar 8 at 0:38

stephenweinstein · Answer 2 · 2010-03-06 22:07:11Z UTC

Money spent can acquire or increase an ownership interest in real estate cannot be deducted all at once.

Now that he owns the building, he can deduct the "depreciate" each year that he continues to use the building for business until he has deducted his entire cost for the structure.

However, he cannot deduct any portion of his cost for the land until he sells.

Remedy · Answer 3 · 2010-03-07 18:58:10Z UTC

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Had taxpayer filed a timely action for title under some equitable title view re Dad back when Dad passed I might see merits of the defense point--but it sure reads like this was just a buy out if brothers 1/2

answered Mar 7 at 18:58

Remedy
186●3

Taxpayer had a prima facia case for adverse possession, but NY does not respect that doctrine and therefore a settlement was proper. Do you think that would change the facts (the adverse possession claim)? – Todd Unger Esq. Mar 10 at 14:14

Is a lawsuit settlement paid by Taxpayer to defend the property where the taxpayer was running his business a deductible expense?

3 Answers