Increase in basis?

[ILLMAS]

TP inherited a building (100% rental, no personal use) with a FMV of 1M, a family member lawyered up and wanted a piece of the pie, after of a couple years of back and forth negotiation, TP and family member settled on $200K, TP also paid about 50K in legal fees.  Would the 200K be an increase to TP basis and the 50K could be expensed on Sch E?  

Thanks

MAS 

[rfassett]

If I am understanding the scenario correctly there would be no addition to basis fro the $200,000.  Or I guess you could increase the basis by $200,000 if you first reduced the basis by $200,000.  It sounds like the courts or the facilitator simply redistributed the assets.  The family member would have received $200,000 of the building and your client would have received $800,000 of the building.  When your client writes the check, his basis then goes to $1,000,000.

I do not see the legal fees as being a Schedule E deduction.  Maybe schedule A because your client is trying to protect his assets - but Schedule A might even be a stretch.  I would probable lean toward increasing the building basis by the $50,000 of legal fees.

[Catherine]

Legal fees are deductible when paid to protect sources of income.  We don't know all the details of this case, but depending on what the other family member originally demanded, it could well be that these fees (or some part of them) protected the income source.