A client buyer received a land instead of original loan receivable from a seller. The buyer paid off the purchase loan. Now, the seller alleged that the buyer committed a fraud at the time of sale because buyer forced seller to transfer the land, when seller had better price offers. Seller filed a lawsuit for the damage claim to pay for the sales price difference.

Is there any way for the buyer to deduct the legal fees?

Normally, legal fees are not deductible if it is for the acquisition of the property. But, sometimes it may be deductible in case of investment property as 2% AGI misc. deduction. I tried to find regulations or court cases but failed to find. Please help.

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>>sometimes it may be deductible in case of investment property as 2% AGI misc. deduction<<

I'm not sure what this refers to. Legal fees to defend title, determine FMV, and other acquisition issues should be capitalized whether business use, investment, or inventory property.

According to the Instructions to Schedule A, investment expenses are deductible when "paid to produce or collect taxable income and manage or protect property." That doesn't seem to me to fit your description.

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