Posted by Abundant Wealth Planning LLC

Condemnation and Your Taxes

Condemnation and Your Taxes

What happens when the government reaches out lawfully or forcefully to take over your private property? Does a property owner get compensation for the takeover, and if they do, what are the chances that you can get a tax-exception from such a situation? So many questions, so let's get answers!

The term "Condemnation" refers to the confiscation of an individual's property by the government for public use. In this situation, the government exercises eminent domain's powers to seize private property and make them public. The U.S, states, and the federal government have the ability of the eminent domain to condemn and transfer personal property. The property can be used for various projects at the government's discretion, such as powerlines, airports, railways, etc. 

When condemnation happens, the forfeited property owner is entitled to just compensation representing the property's value. The just compensation is paid to the individual as the price of the forfeited estate. If the property owner thinks the settlement is unfair and doesn't reflect the property's value, he can seek redress in court. 

Before getting excited at the prospect of earning from the government if your property is in condemnation, you should know a tax angle to this approach. 

The estate exchange between the government and individual through just compensation is viewed as a taxable sale of the property. When such an exchange occurs, it is a taxable sale of the property, which means the IRS re-records the compensation, and as it is with all gains, it is expected that the owner pays taxes. 

Although the proceeds from the condemned estate are taxable, there is a code provision in section 1033 that allows for an exception with taxes regarding properties taken by the eminent domain. Generally, when you sell your real estate and reinvest the proceeds, you can avoid paying income taxes on the sale's profit. This code explains why you don't pay income tax when you sell your property and use the gains to buy another home. 

In section 1033 of the IRS policy on the sale of assets, there is a similar code for condemned properties. It states that property owners are qualified for non-recognition of gains for taxes given certain conditions. The compensation that will be eligible for non-recognition of taxes include the following: 


If it is lost, business profits are seen as "Ordinary income."

  • Cost of relocation and other expenses

  • Compensation for the destruction of properties 

  • Payments for the delay in settlement 

Please note that the possible tax exemptions for condemned properties don't apply to all eminent domain compensation as the ones mentioned above are qualified. In some cases, real estate owners receive a large condemnation award, making the tax bracket allocation process complicated. Due to this situation, we advise that before accepting a just compensation or any condemnation settlement, discuss the tax implications with an attorney or a tax expert.

The condemnation of private properties can incur some tax consequences, but there are exceptions for "involuntary conversions," which happens when property owners sell under the threat of force. Property owners face a great deal of stress losing their properties this way, which is why you should act on the provisions in section 1033 to qualify for the non-recognition of taxes after getting your compensation. 

Although the government by law has the power to exercise its rights of eminent domain, you also need to ensure that you are giving up that piece of real estate and overpaying taxes from the compensation. If the transfer process has any of the exceptions itemized above, seek an eminent domain attorney's expertise to ascertain the tax implications.


FOR MORE INFORMATION OR TO MAKE AN APPOINTMENT WITH Abundant Wealth Planning, LLC, TO SEE HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Abundant Wealth Planning LLC
Contact Member