Tax
Oct. 1, 2026
Tax traps in construction defect and property damage settlements
While lawsuit settlements are generally taxable, construction defect and property damage recoveries often follow different rules that can reduce, defer or even eliminate tax.
Robert W. Wood
Managing Partner
Wood LLP
333 Sacramento St
San Francisco , California 94111-3601
Phone: (415) 834-0113
Fax: (415) 789-4540
Email: wood@WoodLLP.com
Univ of Chicago Law School
Wood is a tax lawyer at Wood LLP, and often advises lawyers and litigants about tax issues.
Plaintiffs in lawsuits often ask if their settlement is going to be taxable. The answer varies, but in most cases, the safest answer is yes. Virtually any money changing hands in a lawsuit is taxable, or more exactly, it is includable in the plaintiff's income. The most common exception is compensatory damages for physical injuries. They are tax free by statute, but what qualifies as "physical" enough for an exclusion is famously cloudy. But outside of that exception, the pla...
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