EMINENT DOMAIN

[1040shredder]

A client received compensation from the county/state for buying part of his land for road widening. He received a 1099-S he still owns his house and has not sold his home. So I am using form 4797 instead. I was thinking that I can allocate a portion of the adjustment basis of his property to the area taken by eminent domain. Can I also  report how much the property would of been if sold in the future? Need some guidance on this one. So property was bought for $245,000.00 in 2009, is valued at apx. $400,000.00. He received $30k from the county/state.  Client is trying to figure out how much it will be once they start widening the road. Thanks in advance. 

[qbteachmt]

Your client has a Land Sale.

It isn't clear what this means or the purpose: "Can I also report how much the property would of been if sold in the future?" Report where?

[joshuabarksatlcs]

Taxation on eminent domain payments depends on the facts and circumstances.  For example, does the owner retain the beneficial rights?  

For what it's worth, see if this helps.

https://www.thetaxadviser.com/issues/2014/mar/kebodeaux-mar2014.html

Good luck.  

[BobKamman]

Are you sure they didn't buy just an easement, not title to a strip of land?  Have you seen the deed?

[1040shredder]

as in cost of basis of the property...  

[1040shredder]

Thank you for the info. Client is going to touch bases with the county. He has no idea. 

[1040shredder]

He is unaware if the state made any changes to the deed yet. He will contact the county. thank you 

[qbteachmt]

There should be New Deed, to separate a sold portion from the unsold portion. Road activities typically buy the land, not just easement rights, because of liability issues, future improvement needs, runoff and other potential mitigation issues, right of way value, etc.

[BobKamman]

I have no idea what's typical in your jurisdiction because I don't know where you are.  Around here, it's mostly done with a permanent easement, and he would have signed a new deed granting it over just that portion of his property.  And then he would reduce the basis of either that part of it, or the entire parcel, so there would not be a sale or a gain until the basis fell below zero.  

[rcooley25]

The only Eminent Domain I know of is with a divource where the eminent domain goes to the wife. She gets it all,

[BobKamman]

Do you know what you're talking about?  Are "beneficial rights" something like "sacerdotal rites"?  They widened the road, he gets to use it like everyone else, is that a beneficial right?  What would be the opposite, a detrimental wrong?  "I can't grow corn there anymore, I have been detrimentally wronged."  In any case, buy me a bottle of Springbank sometime and I'll tell you how I fought the city for a $1,000 water-line easement because they were playing high and mighty and didn't ask my client first.  (She didn't know she had inherited it and no longer owned the property itself, but would have given it away for free if they hadn't been so nasty.)  

[joshuabarksatlcs]

Since I was the only one mentioned "beneficial rights", I imagine your questioning was directed at me.

My point was NOT whether the Asker's client retained beneficial rights.  My point was NOT to tell my fellow tax preparer to look into beneficial rights.  My point was "facts and circumstances matter when it come to taxation on money received in Eminent Domain situations".  Just that.  Use you normal power of comprehension.  Beneficial rights was JUST AN EXAMPLE.

You could split hair about beneficial rights, detrimental wrongs, sacerdotal rites... and what not.  It's NOT relevant to my point.  My point, stated above,  is simple.  When the Asker's client was even "unaware if the state made any changes to the deed yet" and would "contact the county. thank you", I think I had delivered my point across.

Bob, you know a lot of things and have a lot of "hairs" to split, so to speak.  I honestly learned about tax practices from you.  But then, April or not, equally honestly, I care about how you "fought the city for a $1,000 water-line easement because they were playing high and mighty and didn't ask your client first" as much as I care about whether you wet the bed.  That should wrap this matter up.  

Enjoy the next two week in helping your client, tax-wise or fighting the City-wise.

[dkh · Accepted solution]

I'll tell you how I've handled this type of transaction for my clients.  I report on Schedule D - report the proceeds from 1099-S with a matching cost basis.  Client will then have a reduced basis in their remaining property by the proceeds.     No need to call the county/state/or Ghostbusters......

EDIT:  CALL THE COUNTY/STATE/or GHOSTBUSTERS if you need but I'm betting your client has all the documents you need to make an informed decision on how to handle this transaction.

My apologies if my original answer was misleading.

[BobKamman]

As I always say, don't allow missing facts to get in the way of a good negligence penalty.  

I usually avoid saying it in public, though.  IRS might be listening.  

[sjrcpa]

The county/state did not just give him $30,000 without a bunch of paperwork.

[dkh]

@BobKamman Why do you always assume we don't know what we're doing?  You are the one and only one smart enough to do this transaction correctly? Don't think so. 

My answer was based on my experience with my clients and the paperwork presented to me.   Did you see this paperwork - NO - so don't assume I'm being negligent. 

[1040shredder]

I agree. That's why I told him that I need to see all the legal documents first. So I uploaded my situation while I waited for him to gather/look for those documents. Needed some advice and guidance. Which I am grateful for everyone's input. Btw a new deed was drafted & sign. where he grants the State highway admin of the MD Dept of transportation its successors and assigns forever in fee simple, all rights .... all the land... then includes the square feet and so on. Now that's clear.   

[joshuabarksatlcs]

WOW!!

My high school son is playing hooky today and saw me here giving @BobKamman  and @sjrcpa kudos for their comments. 

He asked we about Bob and this forum.  I was going over a concept for his economics class with him and we went off the tangent on Eminent Domain.

Anyway, I told him Bob is somewhere between all-knowing and know-it-all.  I learn from his all-knowingness and laugh at, off or with with his know-it-all crap.  (See my earlier post about him wetting his bed.)  

Along this line, let me fill in the gap for his post, because, here in this forum, as @IRonMaN  always jumps on my case, I'm the one capable of typing many many many lines and thus should be the designated fill-in-the-gappers, aka reading-between-the-liner.

I suspect, if Bob had my propensity of writing it all out, he would have written:

" To @1040shredder : @dkh 's comment, which you gracefully accepted as the solution, was based on dkh's experience with dkh's clients and the paperwork presented to dkh.   Therefore, @1040shredder , as you're shredding your clients' 1040's,  make sure to based on your experience with your clients and the paperwork presented to you.  As I always say, don't allow missing facts to get in the way of a good negligence penalty. I usually avoid saying it in public, though.  IRS might be listening. " 

To me, the words in this style were understood. (I don't know how to spell italicized.)

Bob's words are in bold. 

Now that I've burned another 3 to 15 minutes for everyone (Bob takes the low end of 3; he's a fast reader), do you all feel better now?

Billable work is calling.  Back to the salt mines.

[BobKamman]

Bottom line:  Accepted answer is correct if an easement is involved.  Additional information supplied by preparer who sought the facts, shows that it is a sale, and the basis of that part of the entire parcel must be determined -- it's wrong just to reduce the basis.  

And it's always wrong to tell someone not to require needed facts.