Tax liability from litigation settlement?

Question

I recently received money from an arbitration settlement. The reward was based on a 1998 Earthquake insurance claim that was never resolved. In my original court filings, I had only asked for $$ to cover damages to the rental property I own. In the settlement, the Insurance company did not admit to fault. I have already spent $$ over the preceding years to repair my property. The reward I received covers the expense I have already incurred and provides for additional funds for possible future improvements to the rental property that I may, or may not incur. What portion of the reward do I have to pay taxes on? Does it only matter it is compensatory vs. punititive? I have to pay taxes on punitiive and not compensatory?

Answer 1

To my knowledge, these sorts of things are not normally taxable.
However, if you claimed an unreimbursed loss on your tax return or deducted as you paid out of pocket for the repairsyou might have to re-state your prior tax returns.
I would recommend you contact a good CPA to ensure you are filing properly and that you filed properly in the past.

Answer 2

Compensatory vs. punitive does matter - punitive is taxed, compensatory isn't. This one might be work spending a couple hundred dollars for a CPA.