Ongoing Legal Expense - Residential Rental

[hmosbergea]

Residential rental can't be sold due to ongoing easement lawsuit. Are legal expenses ($15,000 in 2020) with more coming in 2021 deductible currently OR not until case is decided OR ??

[BobKamman]

A dearth of facts here so I will make some up.  The state has offered $10,000 for the easement and the owner thinks it's worth $50,000.  The tenant is still in the house and pays the same rent because so far nothing has happened.  If the judge or jury rules in favor of the owner, the judgment includes reimbursemet of legal fees.  

I would add those costs to basis of the property, then subtract from basis whatever is collected.  But would you adjust only the basis of the land, which might result in a gain, or also the building?  Decision for another day.  

[hmosbergea · Accepted solution]

Additional information: The client (being sued) wanting to sell the residential/commercial rental is being sued by the neighbor behind him for an easement to enter his property thru the clients parking lot.

I hope this helps.

[qbteachmt]

Did you read Bob's answer: "I would add those costs to basis of the property"

You can't deduct this now; it's not settled, so you have no idea what will end up happening. You can't deduct it later, because that is not Expense; it's being invested in the property rights or in defending property rights. Or, there will be Easement payment which offsets the change in basis.

Which is why Bob answered the way he answered.

Is there something else there that you feel does not apply to your facts and circumstances?

[hmosbergea]

Thank you to both responders for answering question re. rental legal question.