It’s an unfortunate reality, but oftentimes a new landlord will inherit property and phase out a long-term tenant to attract a new tenant that will pay more rent. In this scenario, the old tenant can sue the landlord for wrongful eviction, and their earnings from the lawsuit are considered income, and therefore subject to taxation according to the US tax code.

Settlement money and other sources of income that are not classified as typical work wages are subject to unique types of taxation. The tax code clearly defines gross income as all income despite its source, unless there is a clear exclusion stated by law. The tax treatment of a wrongful eviction payout, or settlement, differs from the tax treatment of a personal injury settlement in this regard. Payouts from personal injury lawsuits are tax-exempt, and this has been clearly defined by law and legal precedent. In interpreting this document from 2011, it would seem that a taxable settlement would need to disclose the full amount of the settlement received before the attorney’s fees. Formally, taxpayers were able to deduct a lawyer’s costs (so long as they exceeded 2% of the plaintiff’s income) as a miscellaneous itemized deduction, but these deductions were essentially eliminated in the major tax overhaul that occurred back in 2018. In some settlements, the defendant is required to offer “tax relief.”

The audit guidance provided in the linked document also suggests that two 1099s should be filed by the defendant: one to you as the plaintiff listing the full amount of the settlement, and one to the relevant attorney disclosing the full amount they sent to the attorney’s settlement account. The IRS will check to ensure that the defendant issues these documents and follows through on required tax payments. 

Assessing how to tax lawsuit settlements for wrongful eviction payouts can be tricky. Laws have been altered as recently as 2018, and knowing how to classify eviction settlements on your taxes may be difficult. Thankfully, the professionals at Dimov Tax have years of experience navigating tax codes and staying up-to-date on modern practices. Dimov Tax can analyze your finances and help you disclose all of your income and file your taxes accordingly. The tax treatment of wrongful eviction is not clear, and that’s why Dimov Tax can interpret your unique situation and give you tailored advice and tax services that meet your specific needs. Give them a call today to see how Dimov Tax can identify the relevant tax law and help you avoid further struggles with the IRS. Learn how to tax your eviction lawsuit settlement funds as earned income, and see which laws and codes apply to your situation!