Legal Question in Tax Law in California

Is class action Real Estate settlement Taxable?

I own a house in Valencia - near L.A. CA. Bought new in 1989. Had defective plumbing. Law firm sued builder - class action - on behalf of about 2000 of us. Won $7300 settlemt for me. I assume that this is a return of principal - reducing my basis - and not taxable income. My theory is that they sold me less than they agreed to and returned part of the price when caught. Am I right or is it somehow taxable?


Asked on 8/03/01, 5:10 pm

1 Answer from Attorneys
Ken Koenen Koenen & Tokunaga, P.C.

Re: Is class action Real Estate settlement Taxable?

Neither is correct. The $7300 is not taxable income, nor is it a reduction in price. You have been compensated for the value of the plumbing defect. If you do not spend the money to fix the plumbing problem, you will need to disclose this problem when you sell the property. This would likely result in a lower selling price. That is where the difference in your capital gains comes into play.

You now have an allowance for a taxable gain of $500,000 at the time of sale, if married, or $250,000 if single. Chances are the change of basis would not have much impact on you.

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Answered on 8/14/01, 3:10 pm


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