Taxation and Settlement Issues

[Ummonx]

What is the name of your state? NY

Thanks in advance. Got a quick question. My Uncle was sued for unjust enrichment by a relative that made improvements to their house. The Lawsuit was nonsense but to get these people off their back (the are disabled) we settled for lump sum amt of 25,000

I have a couple of questions
1) I have "heard" that some settlement dollars are non-taxable to the payee. However since this is a case of unjust enrichment would the Payee have to pay taxes on the settlement?

2) Can the Uncle deduct the settlement off his taxes since its technically a "loss"

3) out of curiosity, (these people were real scum) would the IRS be interested in someone who lived rent free for 13 years in someone else's house? That is considered Income correct?

Thank you in advance

[FlyingRon]

Originally Posted by Ummonx

1) I have "heard" that some settlement dollars are non-taxable to the payee. However since this is a case of unjust enrichment would the Payee have to pay taxes on the settlement?

The taxability depends on how much they paid to make the improvements. However, typically the settlement is structured to make this neither a gain nor a loss.

2) Can the Uncle deduct the settlement off his taxes since its technically a "loss"

It's not a loss technically or otherwise. His property presumably was improved by the amount he paid. He can use it increase his basis when he eventually disposes of the property however.

3) out of curiosity, (these people were real scum) would the IRS be interested in someone who lived rent free for 13 years in someone else's house? That is considered Income correct?

No. Not in itself.