Settlement Payment for Damages

[cientax]

Have a client Real Estate Builder/Developer, owns property in subdivision getting it ready for development and has water lines/pipes running on the property. A contractor working for one of his partners on connecting property that the partner owns damaged the water lines/pipes on both properties. They did not file law suit but the contractor that did the damage paid the partner compensation for damages to both properties, then the partner paid my client for damages done on his property. My client settled for about $100K and wants to know if this will be taxable to him. He is not incorporated, but is SMLLC if this makes any difference. He will be getting K-1 from the partnership.

Thanks.

[jklcpa]

It would depend on the language of the agreement, I suppose. I didn't look up to provide you links, if the payment is truly for property damages, it would reduce the basis in the property, and if that payment exceeds the basis, then the basis in the water lines & pipes would be reduced to zero and the excess would be taxable income. Any part that is a punitive damage and not specific to the property damage would be taxable. You should do research of property damage awards and settlements to document your handling for your files.

Are you the preparer of the partnership return?

[cientax]

I am not the preparer of the partnership return. The SMLLC client is the one I preparer returns for and thanks for your information.

[michaelmars]

how can their be a partnership return for a SMllc?

[Mr. Pencil]

Have a client Real Estate Builder/Developer, owns property in subdivision getting it ready for development and has water lines/pipes running on the property. A contractor working for one of his partners on connecting property that the partner owns damaged the water lines/pipes on both properties. They did not file law suit but the contractor that did the damage paid the partner compensation for damages to both properties, then the partner paid my client for damages done on his property. My client settled for about $100K and wants to know if this will be taxable to him. He is not incorporated, but is SMLLC if this makes any difference. He will be getting K-1 from the partnership.

Thanks.

This is a confusing post. I can't tell what the relationships are among the client, the LLC, the partner and partnership, and the contractor. It is not clear who suffered damage or in what amount, and the purpose of the K-1 distribution. If you want to explain things, start with the K-1 because that's what the IRS will do.