Tax Implications in Settling a Construction Defect Claim

August 1, 2017
Tax Implications in Settling a Construction Defect Claim

Have you thought about the tax implications in settling your construction defect claims? My clients often ask me whether the settlement or judgment money from their construction defect claim is taxable as income. The U.S. Tax Code defines income very broadly under 26 U.S. Sec. 61 and provides that “gross income means all income from whatever source derived,” unless exempted by the tax code. Under this broad definition, settlement or judgment from the construction defect claim would be taxable.

Fortunately, the IRS has issued several Field Service Advisory and Revenue Rulings that provides some insight as to how settlements or judgments arising from construction defect litigations are treated under the tax code. While not codified in the tax code, the IRS has determined that a settlement or judgment arising from construction defect litigation is not taxable gross income under specific circumstances. However, the settlement or judgment does have tax implications, which impacts your interests in the property. Call us today to discuss the tax implications arising from your actual, or potential, settlement of the construction defect claims.

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