Taxpayer asks:
Can I reduce or eliminate taxes from civil suit and punitive damages winnings by immediately investing in a home?
Taxgirl says:
Unfortunately, no. You can’t reduce or eliminate taxes from the proceeds of a lawsuit by investing it in real estate—or any other kind of asset.
I think you might be thinking about the pre-1997 rule that allowed homeowners to get a break if they used the proceeds from the sale of their primary home to buy another home. That rule was eliminated, and now homeowners can exclude capital gains of $250,000—$500,000 for married taxpayers—when they sell their homes, no matter their age or whether they buy a replacement property.
When it comes to other kinds of income, including lawsuit proceeds, there’s no immediate tax benefit to simply flipping it into a home. There might be a personal benefit—a place of your own—and a possible tax benefit down the road—real estate and mortgage deductions—but you must still report the original income on your taxes.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
