Im really glad I asked in here, because all these things that have been mentioned have been fighting around in my head!   LOL

It really doesn't matter which way I do it, there wont be any tax consequence, but I wanted it straight in my head...but it looks like everyone sees it from a different perspective.

Originally when he called me about it back in December or January, I figured all of it would be worked into the sale (at that point I didnt realize that any rents had been collected from the tenant, they just had a prior tenant squatting that needed to be ousted in order to sell).

The when he came in a few weeks ago he showed me rental income from this tenant and since the tenant was still in there when the attorney was hired and the payment had been made to them to get out (as  mentioned like a  "cash for keys" type of scenario), it was still technically rental unit when all this occurred, that would be a rental expense.

I think Im going to split it up, adjust basis on the sale for the payout to the tenant, take the attorney fees for the eviction on Sch E.

And no, there wasn't any 1099 issued to the tenant, didnt even cross my mind to be honest.  and theyre long gone now, so if thats something that should have been done, we'll have to take our chances.