Discussion:RENTAL LEGAL FEES

In reference to Dave Fogel's comment, if I understand you correctly is that at some point in time when the client decides to sell the property, that the amount spent on legal fees is added to the basis.

It would be different if it related to operation of the property, such as trying to recover the costs of a settlement in a slip and fall lawsuit because the defective railing broke.

In addition, the taxpayer lost this suit. There is no future benefit, this was not a cost to acquire the property, to improve it or to defend its title.

I'm not saying Dave's wrong here, that's just my 2 cents.

And, what if there was a second suit where property owner sued builder for constructing a defective railing?

Costs to build the building are additions to basis. Costs to improve the building are additions to basis. Costs to force the builder to improve a defective building are additions to basis.

Costs to perform routine repairs that do not improve or extend the useful life of a building, which is already in operation are deductible. Costs to defend against a lawsuit relating to a specific event such as a slip and fall injury are deductible. Therefore costs to recover those expenses against a builder who was ultimately responsible for those are deductible.

Same plaintiff and defendant, different facts. What were the details of this lawsuit?

We know the plaintiff is the owner of the rental property and the defendant was the builder. What was the nature of the defect that was the subject of the litigation?

I think I'm headed where Ckenfick was headed, but I'm still thinking we'll end up where DaveFogel wanted to go.

And here's another question: Was it "kind of" fixed before the tenant came in and did the specific damage occur while the tenant was occupying the property?

And what kind of damage was it - a roof leak?

And why did client wait so long to sue..."Over a number of years?" Come on. Maybe the property was in fine shape and client is just trying to pin the damage on the builder?

To date, water still comes in, depending on the severity of the rain. It was not a roof leak or any kind of damage. The builder did numerous things over the years to correct the problem, but nothing worked. The main purpose of the lawsuit from what I’m told was to rescind the contract since the builder could not fix the problem and the property could not be rented with water coming in. The builder was the one spending the money and could not fix the problem. The legal bills were itemized based on what the attorneys were working on.

To answer Ckenefick’s question, every time the builder did something to correct the problem the client said he would wait until it rained. A couple of times he thought the problem was corrected and that is when the property was rented, only to have rain come in again with the people living there.

But as DaveFogel pointed out, it is hardly ordinary, and relates to the acquisition of the building.

If the suit sought to make the contractor repair the problem, I would say it was an expense, but I think we all have a serious problem with the costs of a lawsuit that seeks recission of the purchase being filed 5 years later. I have seen recission denied when the transmission of a car fell out in a suit filed within months of the purchase. So I personally, would look up the suit on the clerk of the court's website and perhaps call the attorney, to see if he can help explain it to you or give you some sort of letter.

In this case, the taxpayer was a common carrier engaged in motor freight transportation in interstate and intrastate commerce. In Issue 24 of this case, the taxpayer contracted with a construction company (Brown & Matthews) to build terminal facilities at Jersey City, NJ. Structural defects, including sinking floors due to improper foundation work, cracked walls, defective plumbing, etc. were discovered after the construction. A claim was made against Brown & Matthews. Litigation ensued in New Jersey Superior Court. The lawsuit was settled in arbitration -- Brown & Matthews paid the taxpayer $75,000. The taxpayer treated the $75,000 as a reduction of the cost of building the terminal facilities, but deducted the legal fees of the lawsuit as business expenses. The IRS capitalized the legal fees, and without discussing its reasoning, the Tax Court agreed.

The taxpayer treated the $75,000 as a reduction of the cost of building the terminal facilities, but deducted the legal fees of the lawsuit as business expenses. The IRS capitalized the legal fees, and without discussing its reasoning, the Tax Court agreed.

I agree too. You can't have it both ways.

In Letter Ruling 200513011, the taxpayer hired a contractor to build a residence according to plans designed by an architect. After moving in, the residence sustained water damage caused by faulty construction. The taxpayer sued the contractor and architect for breach of contract, breach of implied warranty for fitness, negligence, and faulty construction, and was awarded damages in addition to legal fees and costs.

The taxpayer requested a private letter ruling that the damages received, excluding the legal fees and costs, represented a nontaxable return of capital that decreased the taxpayer's basis in the residence, which is exactly what the IRS ruled.

The taxpayer requested a private letter ruling that the damages received,

Still not sure why he requested a ruling...there's already plenty of law on this, in his favor.

But, my point and Bruce's point is that we don't know the extent of the "faulty construction" in the OP's case. In the PLR, damage was clearly signficant and capital - $75k or so.

But what I'd really like to see is the court docket, the pleadings, and whether the bill indicates exactly what it was for, or if the lawyer could break it down for me. There are a lot of possibilities. Flood losses come to mind. Legal advice on other matters. Impairment.