Eminent Domain

Today TaxMama hears from Penny in Kansas who asks. “If a gas station owner is forced by the government to sell part of his property so a street can be widened, is that considered involuntary conversion? Eminent domain? Do you know how this situation should be treated tax-wise?”

Hi Penny,

You’re right on both counts. The property has been ‘sold’ due to eminent domain law – where the owner has little or no choice about the sale.

If you’re following the issue in the news, the Supreme Court has allowed local governments to force small property owners to lose their homes or businesses, simply because the local government wants to grab the property for the benefit of a bigger business – ostensibly so the government can get higher property taxes. In reality, because the bigger business really wants that location and has undoubtedly been generous with campaign contributions.

Scary. I am shocked at this decision of the current Supreme Court.

And you’re also right about this being an involuntary conversion. What does that mean for tax purposes?

You don’t have to pay tax on this sale right now. You can simply reduce your basis (your tax cost) of the whole property by the amount you receive.

Of course, if this seizure required you to remodel and build new driveways, etc. be sure to keep all those receipts in a permanent file – add those costs back to the basis of the property – unless they are being depreciated.

There may be other tax benefits, please read IRS Pubication 547, Casualties, Disasters, and Thefts. https://www.irs.gov/publications/p547/index.html

There’s an Involuntary Conversions section of Publication 544 which covers Sales and Other Dispositions of Assets https://www.irs.gov/publications/p544/ch01.html#d0e1144
And remember, you’ll find answers to questions about eminent domain and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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  • Ask TaxMama :: Where taxes are fun and answers are free
  • TaxTwist.com :: Where TaxQuips will be moving & You can add your comments
  • Washington Post :: Supreme Court Decision about property seizure for commercial use.
  • IRS Publication 547 :: Casualties, Disasters, and Thefts.
  • IRS Publication 544 :: Involuntary Conversions section of Publication 544 which covers Sales and Other Dispositions of Assets

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