Have a new one. Client bought home in 2012 for $466,000. They began having stucco issues in 2017 so they brought in many experts (builders, engineers, etc) to review the issue(s). My client sued the seller for failure to disclose these issues and ultimately won the law suit in 2019. Cost to repair the stucco was approximately $265k and legal fees were approx. $80k split between 2017 (5k), 2018 (15k) and 2019 (60k). He was awarded $195k + $10k punitive damages + $15k in Pre judgement interest.
I know the treatment of the punitive damages and pre judgement interest but wondering about the $195k. Can it be treated as reduction in basis (and then the repairs increase his basis)? I've read that recovery of damages due to loss in value is not taxable but a reduction in basis. I'm not aware of any FMV assessment that the client had done, but it could be reasonable to determine that the cost to repair is the reduction in value. The 'origin of claim' seems to be a compensatory, contractual suit. Thoughts?