Sch E for these legal fees ?

[jklcpa]

Client paid legal fees out of SMLLC related to defense against a tenant's personal injury claim. Are these legal expenses deductible on Sch E?

 

[Lee B]

My off the cuff answer is yes deductible !

[Max W]

The IRS is of little help on this.  They only say legal advice and tax prep are deductible.

Other references say it eviction expenses are deductible, but there is nothing official.  This is something that should be clarified, because it is becoming a big issue in rent controlled areas, such as San Francisco.   One of my clients had to pay legal fees of $25,000 to get a tenant evicted plus another payment to the evictee of $4500 so they could look for another place. Fortunately, there was only one person involved as that is per person, plus another $3000 if there is a child under 18 in the household. 

[DANRVAN]

On 5/31/2020 at 2:08 PM, jklcpa said:

Client paid legal fees out of SMLLC related to defense against a tenant's personal injury claim. Are these legal expenses deductible on Sch E?

 

Case law looks at the origin of the claim to determine if it is related to the trade or business of the taxpayer (or in this case rental activity) and therefore deductible.

If the origin of the claim is instead related to personal actions of the taxpayer, the deduction is not allowed.  So it depends on facts and circumstances.