are street right of way purchases taxable?

[frank]

The city where I live wants to buy a right of way on my property for a turn lane. the amount is in the 5 digits. I was wondering if anyone here has dealt with this and if the money is taxable as income or capital gains. I don't want to pay taxes on this if I can avoid it, but don't know the best way to handle it. any ideas?

 

[pb4uski]

If you donate the right of way then you won't have to pay taxes on it. Do you itemize deductions? Otherwise, you may be taxed.

Is there a particular reason that you don't want to pay taxes... IOW, will the income throw you to a higher tax bracket or over some other hurdle?

Beyond that it gets complicated.

Easement. The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. See Gain or Loss From Condemnations, later.

 

[street]

I'm not sure what is the best route for you as taxes go but it is taxable money. Buying easements or right-way I have always had to claim as income. Good Luck.

 

[pb4uski]

I'm not sure what is the best route for you as taxes go but it is taxable money. Buying easements or right-way I have always had to claim as income. Good Luck.

You mean selling, not buying, right?

 

[euro]

The city where I live wants to buy a right of way on my property for a turn lane. the amount is in the 5 digits. I was wondering if anyone here has dealt with this and if the money is taxable as income or capital gains. I don't want to pay taxes on this if I can avoid it, but don't know the best way to handle it. any ideas?

Not a tax expert here but is there a particular reason you think this may NOT be taxable?
I'm not quite sure how your situation arose, but it sounds like the local or state government is claiming eminent domain and making some “fair market offer”. Generally, these offers are negotiable, so you could try to negotiate an additional allowance to cover any taxes. Still, ultimately, you’ll have to PAY the taxes though, I would think.

 

[street]

You mean selling, not buying, right?

Yep. When someone buys (easement) the transaction is taxable.

 

[Bamaman]

But do you receive some kind of tax form--like a 1099? How would the IRS know about the funds received?

 

[skyking1]

If you donate the right of way then you won't have to pay taxes on it. Do you itemize deductions? Otherwise, you may be taxed.

Is there a particular reason that you don't want to pay taxes... IOW, will the income throw you to a higher tax bracket or over some other hurdle?

Beyond that it gets complicated.

The definition of Easement vs Right of Way is quite different. When they broke up the acreage I own, for example, the ROW for a street was taken out of the two lots and the lot lines reflect this.
You can retain partial use and enjoyment of an easement, for example a utility easement that you still mow and care for, etc. ROW for a public street is just gone gone gone and no longer a part of your property description.

 

[frank]

the reason I don't want to pay taxes is it puts me in a higher bracket and who wants to pay taxes if they don't have to. it would be a forced sale because if I don't come to an agreement they will condemn it for eminent domain. I assumed it would be taxable, but thought maybe someone that has experience in how to pay the least possible tax.

 

[street]

the reason I don't want to pay taxes is it puts me in a higher bracket and who wants to pay taxes if they don't have to. it would be a forced sale because if I don't come to an agreement they will condemn it for eminent domain. I assumed it would be taxable, but thought maybe someone that has experience in how to pay the least possible tax.

Take small payment over many years? See if something could be setup with the city with payment amounts?

 

[skyking1]

I am guessing it would be long term capital gains, unless you follow Pb4uski's hint here:
https://www.irs.gov/businesses/small-businesses-self-employed/involuntary-conversions-real-estate-tax-tips
My gut is a good accountant is the way to go with this. Your gain may well be deductible.

 

[pb4uski]

The definition of Easement vs Right of Way is quite different. When they broke up the acreage I own, for example, the ROW for a street was taken out of the two lots and the lot lines reflect this.
You can retain partial use and enjoyment of an easement, for example a utility easement that you still mow and care for, etc. ROW for a public street is just gone gone gone and no longer a part of your property description.

Not "quite different", but some subtle differences... one is granted to an individual (an easement allowing skyking to cross my property or XYZ utility to run lines over or under my property) and the other is broader (like a public road right-of-way) but they are the same from a tax perspective.

... If you grant an easement on your property (for example, a right-of-way over it)...

 

[pb4uski]

I am guessing it would be long term capital gains, unless you follow Pb4uski's hint here:
https://www.irs.gov/businesses/small-businesses-self-employed/involuntary-conversions-real-estate-tax-tips
My gut is a good accountant is the way to go with this. Your gain may well be deductible.

How can a gain be deductible?

 

[skyking1]

exempted due to the circumstances would be a better way to put it. It's worth a professional consultation.

 

[Ronstar]

Don't know if this is true or not, but someone told me that the proceeds are not taxable if the city, etc has to condemn the property in order to get it.

I worked on hundreds of roadway property acquisition projects, and most of the properties were obtained through condemnation. In Illinois, the state etc has the right to "quick take" where the governing entity gets the property in exchange for giving the owner the appraised value. The owner can later take the issue to condemnation court if they feel as if the property was worth more than the appraised value.

https://www.natlawreview.com/article/what-quick-take-eminent-domain-law

 

[cathy63]

Don't know if this is true or not, but someone told me that the proceeds are not taxable if the city, etc has to condemn the property in order to get it.

I worked on hundreds of roadway property acquisition projects, and most of the properties were obtained through condemnation. In Illinois, the state etc has the right to "quick take" where the governing entity gets the property in exchange for giving the owner the appraised value. The owner can later take the issue to condemnation court if they feel as if the property was worth more than the appraised value.

https://www.natlawreview.com/article/what-quick-take-eminent-domain-law

You may be thinking of a 1033 exchange? https://www.law.cornell.edu/uscode/text/26/1033

It's similar to a 1031 exchange but you have 2 years past the end of the tax year in which the condemnation occurs to acquire the replacement property. The tax is not forgiven, just deferred, as the basis of the original property is carried over to the replacement property.

 

[Ronstar]

You may be thinking of a 1033 exchange? https://www.law.cornell.edu/uscode/text/26/1033

It's similar to a 1031 exchange but you have 2 years past the end of the tax year in which the condemnation occurs to acquire the replacement property. The tax is not forgiven, just deferred, as the basis of the original property is carried over to the replacement property.

Hmmm. That really could have been what was explained to me. I heard it third hand from an old guy, so who knows what the original story was.

Thanks - I didn’t know that you could 1031 proceeds from a condemnation.

 

[skyking1]

it's relevant to me, as we have some unimproved vacation property that I am planning on doing a 1031 exchange with, once we settle on a target.

 

[euro]

Hmmm. That really could have been what was explained to me. I heard it third hand from an old guy, so who knows what the original story was.

Thanks - I didn’t know that you could 1031 proceeds from a condemnation.

Yes, this is very interesting! However, I'm nt sure exactly what it means. Do you have to dispose of the property altogether that suffered the right of way condemnation or can you keep holding that property and just 1033 the proceeds from the condemnation? Also, in a 1031 exchange, you have to roll over into a "substantially similar" type of asset. Is that the case for 1033 too? If so, what would be an example of something that is "substantially similar" to a condemned right of way? Fascinating topic - just curious!

 

[Koolau]

I am guessing it would be long term capital gains, unless you follow Pb4uski's hint here:
https://www.irs.gov/businesses/small-businesses-self-employed/involuntary-conversions-real-estate-tax-tips
My gut is a good accountant is the way to go with this. Your gain may well be deductible.

I agree - a professional is worth the price when you're talking this much money. You don't want to find out later that your logic doesn't quite please the IRS. (Hey! We're the gummint. We don't have to be logical!)

 

[frank]

I agree - a professional is worth the price when you're talking this much money. You don't want to find out later that your logic doesn't quite please the IRS. (Hey! We're the gummint. We don't have to be logical!)

good one and pretty much what I see of government.

 

[cathy63]

Yes, this is very interesting! However, I'm nt sure exactly what it means. Do you have to dispose of the property altogether that suffered the right of way condemnation or can you keep holding that property and just 1033 the proceeds from the condemnation? Also, in a 1031 exchange, you have to roll over into a "substantially similar" type of asset. Is that the case for 1033 too? If so, what would be an example of something that is "substantially similar" to a condemned right of way? Fascinating topic - just curious!

In the context of the tax code, the definition of "condemn" is "to take by eminent domain", so no, you can't continue to hold the portion of property that was taken by the government.

Yes, it has to be converted to a substantially similar asset. Section 1033 also covers loss of property like livestock, so if your herd of cows is killed by the government to stop the spread of a disease, I would guess you can invest the proceeds in a new herd of buffalo, but not in a strip mall.

This article has some interesting info: https://www.lexology.com/library/detail.aspx?g=a937df4c-47a4-4c4d-bddd-9bfb3d5f52ff

What Happens if Only Part of Property is Condemned?

A large number of condemnations involve only a portion of the property, for example, a strip of frontage for a street widening. How does section 1033 benefit the owner of the remaining property? In the case of a part-take, a property owner may be entitled to severance damages – the difference, if any, between the value of the remaining property before and after the condemnation. The award of severance damages is applied first against and reduces the taxpayer’s “basis” in the remaining property (generally, original purchase price plus the cost of improvements, minus depreciation) and is not taxable to that extent. Any damages leftover are taxable unless the taxpayer uses section 1033 to restore the remainder or invest in eligible replacement property.

 

[dmpi]

Did the OP actually 'gain' anything? He was just being compensated for his property being taken away from him, similar to winning a lawsuit that makes you whole again. I'm no tax expert but I don't see this as a taxable event.

 

[cathy63]

Did the OP actually 'gain' anything? He was just being compensated for his property being taken away from him, similar to winning a lawsuit that makes you whole again. I'm no tax expert but I don't see this as a taxable event.

Real property has a basis. If you sell it for more than that, even if the sale is involuntary, you have a taxable capital gain.

 

[FLSUnFIRE]

If you are happy with the price but worried about taxes, I'd figure the tax impact and counter with a price higher to net you the amount you are happy with... if they want it bad enough they will pay you or just take it from you anyway against your will.