Discussion:Lawsuit settlements

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Tjones (talk|edits) said:

23 March 2007
Hello

I have a client who was involved in a divorce and owned a joint home with her former spouse. The mortgage was way behind and it nearly ended up in forclosure. The client hired Attorney A to stop the forclosure and to sell the home. Attorney A made some legal mistake and the home ended up in a "quick sale" where the client had to sell very quickly and ended up not being able to get full market value for the home ($120k less than market value). To muddy this even more, all of the client's proceeds of the home were used to settle her ex husbands debt and she received no money. Then client sued Attorney A and settled for $45,000 for legal malpractice. Client thinks that she should not have to pay income tax on the $45,000 because she would have gotten at least this much more in the home sale.

Assuming client meets all other requirements for a home sale exclusion, can she exempt the $45,000? I don't think so, but this seems to be a big mess right now and client cannot afford the taxes due currently.

Riley2 (talk|edits) said:

23 March 2007
Under the relationship back doctrine, this appears to qualify for the Sec. 121 exclusion.

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