Under the Fifth Amendment of the Constitution of the United States, government entities have the right to lay claim to residential or commercial properties for public use. The major condition regarding such an eminent domain action is that the law requires the government to provide “just compensation” to landowners in return for taking the land. Compensation can vary significantly, depending on the type of property, the use of the property, and whether it will constitute a complete or partial taking. Always contact an experienced eminent domain attorney if the government makes you an offer for part or all of your land. An attorney can negotiate with government representatives to ensure you receive a fair settlement offer. Once your attorney negotiates fair compensation, the government will pay the landowner, who must then promptly vacate the property.
However, come next tax season, landowners who receive condemnation compensation may face a surprise—a significantly higher tax liability than usual. Compensation received for condemned property is taxable, just like the proceeds of any other type of real estate sale. Property owners should plan to face a tax liability for any taxable gain that occurred regarding the property. Taxable gain happens when the compensation for the property is more than the tax basis. You can figure out the tax basis of your land by subtracting costs of improvements and depreciation from the price you originally paid for the land.
For example, consider the following:
- Original price: $200,000
- Depreciation: $10,000
- Cost of improvements: $50,000
- Tax basis: $140,000
- Government compensation: $250,000
- Taxable gain: $110,000
This means that you would have to pay taxes on an additional $110,000, which will likely constitute a substantial increase in your tax liability, depending on your regular income. A larger taxable gain is especially common if you have owned the property for many decades or if the property experienced a substantial increase in value since you purchased it.
Fortunately, you can plan ahead to avoid a giant tax bill come tax season. For instance, your state may have a program that allows you to use the compensation you received to purchase another piece of property within a certain amount of time. The IRS may also allow you to conduct a 1031 exchange, which avoids the taxable gains tax, though you must meet recent requirements for this exchange. An experienced eminent domain attorney can advise you as to your options and the possible tax implications of your transaction.
Call the Condemnation Attorneys at Sever Walker Padgitt for Assistance
Tax liability is only one of many issues that may arise during an eminent domain action. At the law office of Sever Walker Padgitt, LLP, our eminent domain lawyers are committed to protecting the rights of landowners, including helping them prevent as much financial loss as possible due to the eminent domain action. Please call (888) 318-3761 or contact us online today to discuss the many ways we may help you.
