Tax impact of a court judgement

3 Replies

I have a court judgement against a former tenant for unpaid rent and damages. How do I include this in my tax return if at all? I assume I can only claim for the assessed damages portion, as I have yet to complete full replacement of damaged items. I seem to recall reading that that even if I cannot collect the debt, which is very likely, that at some time in the future when I forgive the un-collectible debt, it will be recorded as an income against her by the IRS. I have been unable to find my notes on this and wondered if anyone else may be able to clarify the tax implications.

@Steven Hamilton II  

I would think that only the amounts above the damage would be considered income, an offset as to the loss.

Forgiveness of debt is taxable, however, since I've never been on either side I don't know what or who would have reported the judgment to the IRS, if you forgive debt the lien holder reports. I never forgave the debt from a judgment.

You might sell the judgment at a discount to a collection agency.

Income from rental agreements is not earned income until received. I didn't treat a judgment as an asset but a contingent matter, it's an order to pay an amount that was due under a contract, so that debt had already been created by the contract. If additional damages were awarded, that would be as a premium, but on a cash basis, it becomes accounts receivable and collected or uncollected and written off as an expense to off set accounts receivables.

If you're looking for other payback, let a collection agency take care of it, IMO

I'll speak to accounting matters but I don't give tax advice, let Steve, the tax guy, address that, if he will.

I need more coffee.  :)  

If you didn't previously report it as income, on an accrual basis, which you didn't, you can't   later deduct it.  It is simply income you never received, same as it being vacant.

Correct, it is not a deduction. You must include what is collected when it is collected.  Your improvements will be deducted/depreciated as normal.

You do not have to issue anything for a cancelled debt in that case.

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