County bought a portion of my land.

The county i live in just bought 10 feet of my backyard to widen the road behind my property. Of the money I received a small portion was for the land itself and the rest was for damages and to make me whole ie replace my fence, modify septic drain field, loss of trees and so on. What if any of this money is taxable?

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CoryF

Thank you for joining our community, Scbdude.

You are describing an Easement purchase by the county. The proceeds from the purchase (easement) would reduce the basis of your property. Meaning, this payment is not income that is taxable on your 2024 tax return.

When you sale the home, it is possible that the reduction in basis would increase your capital gain making the amount taxable in that year.

CoryF

Giving you the answers you need is important to us. I have pasted your exact questions for my response.

Is this eminent domain, condemnation or easement sale?
Yes, this is eminent domain. Your initial posts were unclear so advice was given for other options.

Next, exactly how should this be handled on my taxes?
You told us that $13,000 was for the land purchased. The rest, $72,000, was for the damages to your land (see explanation in last two answers). The only taxable portion of the payment is the $13,000 which was set aside for the 10 feet purchase. The best option, to figuring out the gain, is to divide the original land into square feet. Divide the original cost by the amount of square feet. Then multiply that number by 10. For example, you figure your land is worth $1,000 per square foot. The cost basis for the 10 square feet would total 10,000. FreeTaxUSA (2024) has a place for all investment pages. This eminent domain sale starts with the 1099-B tile since it has to do with investment property. After clicking Other Property, the inputs would be Sales Proceeds - $13,000; Cost Basis - $10,000; resulting in a gain of $3,000 to be claimed on your taxes.

I am a disabled veteran if that will change anything for me.
There is no special treatment for Veterans and Taxes in this case. This is a simple eminent domain purchase of your land and restoration of damages

What is the cost basis of my property? How much i paid for it over 20 years ago?
Your land basis is what you paid for it originally. The refinancing doesn't or shouldn't change the value.

Some of the repairs to my property i did myself so I didn't have to pay as much out of the money I got.
You need to determine exactly what you spent from the $72,000 on the repair. The rest of that money adds to the original basis.

I was under the impression that any money paid above and beyond the value of the land for damages/make me whole again was not taxable.
For example, your land has a $200,000 original basis in the land and you spent only $2,000 of the money on the repair. The difference, $70,000, adds to the basis. From the example above, you need to subtract the basis assigned to the sale, $10,000. The resulting basis calculation is $200,000 - $10,000 (sale) + $70,000 (money after repair cost) = $260,000 after this event. The $70,000 is not taxable but it does add money to your land for when you sale it in the future.

This is a very complicated land sale situation needing care in my answer. I have provided all that you need to know given the information that you provided in this thread. If it is still unclear, I would suggest that you purchase Pro Support within FreeTaxUSA to be guided specifically and within each tax input page with the exact calculations following the examples in my post. Another suggested option could be to have a professional CPA handle this year's taxes to be compliant with the IRS and then you can return to using FreeTaxUSA to prepare your own taxes for the 2025 taxes.

CoryF

You are welcome.

There are several things that can add to Cost Basis. Any improvement to the land would count as added basis. Examples include: installing a water well, building fencing, roads and paths, ditches or drain areas. We like to provide useful information up front and point to IRS publications for more depth. Publication 551 Basis of assets page 2 continues to provide other less well known basis items for Real Property.

Generally a higher basis would reduce the Capital Gain when the property is sold. Capital Gain is realized by calculating the Sales Price (subtracting selling expenses) minus the Cost Basis.

All comments

CoryF

Thank you for joining our community, Scbdude.

When you sale the home, it is possible that the reduction in basis would increase your capital gain making the amount taxable in that year.

Scbdude

I'm not sure that this is an easement purchase. They flat out bought the 10 feet **** of land. Are easement purchases also eminent domain cases? The county wasn't buying easement they were acquiring the property.

KeriC

@Scbdude Eminent domain would be considered an involuntary conversion by the IRS.

You ordinarily must report the gain if you receive money for the property; ie the land itself. You may elect to postpone reporting the gain if you buy property that is similar or related in service or use to the eminent domain property within the replacement period. The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized.

If you don't plan to purchase similar property (which may be the case if you just sold a 10—foot section of your land), you would report the sale in the year of the involuntary conversion.

The amount received for damages would not be taxable.

Scbdude

So, if I understand correctly, this 10 foot loss off of my property is a reduction in basis. What effect will that have?

CoryF

Thank you for this follow up question.

A reduction in basis reduces the cost of the land. When you sale the land, you must figure out the additions and subtractions that you incurred after purchasing the land. This is known as cost basis and adjustments. Lowering the basis may increase the amount of realized capital gain that is taxable after the sale.

Scbdude

So is the sale of 10 feet of my land a reduction in basis?

CoryF

This is a good question.

To sum up from this conversation.

If you feel that this was an eminent domain acquisition from the county, then you can treat this portion as land sold and record it as a sale of investment property with loss or gain based on the amount of cost from your original purchase (assign cost based on the area purchased).

If you feel that this was an easement purchase for the county to use other property, then you follow my instructions to take the payment of the county and reduce your land basis by the same amount.

Either treatment is correct in the eyes of the IRS for this 10 feet of land bought by the county. The county may have some input as to how they feel the purchase should be categorized and then you can follow the advice of either from this message chain.

Scbdude

How is the cost basis assigned? Als9 you said "if I feel" this was eminent domain. The county came through and bought land from everybody on this stretch of road in prep for widening said road. Is it anything else but eminent domain. The term condemnation was even used. So the amount paid to me was $85,000. Of that only $13000 was for the land itself. The rest was for damages and property reparation. The damages money is not taxable correct? If that is correct then how do I account for the 13,000 on my taxes?

PhillipB

Hello,

New agent here.

When you ask "how is the cost basis assigned" I assume you are asking how would you allocate the total cost basis of all the land to the 10 feet that was sold. If this is correct, I will do my best to provide some options:

Take the total square footage of the parcel (you may need to convert acreage to square feet) and divide the 10 sq feet of sold land / total land sq footage. This is the percent of land sold. Multiply the percentage by the cost basis of the land.
If the sales or condemnation documents estimated total land value and the value of the land condemned, divide those values to come up with the percentage of land sold (13,000 / total estimated land value). Multiply that by the cost basis.
Preserve the entire cost basis by reporting zero cost basis and paying capital gains on the entire sale.

Generally, all of the money involved in a condemnation or a easement sale would be considered gross proceeds for the capital gain calculation. The total cost basis will need to reduced by whatever cost basis you report against the gross proceeds for the sale, but the cost of all of the repairs that you made with the 72,000 dollar proceeds will increase your cost basis in the land after the sale.

Let us know if there are additional questions or concerns.

Scbdude

Ok, so i have been given multiple answers now and remain confused. Is this eminent domain, condemnation or easement sale? The County bought the land from me to widen the road adjacent to my property. Next, exactly how should this be handled on my taxes? Could the government possibly be any more confusing in how the want to shaft me out of my money. I am a disabled veteran if that will change anything for me. And, I was under the impression that any money paid above and beyond the value of the land for damages/make me whole again was not taxable. Ive never heard of damages awarded being taxable ever. What is the cost basis of my property? How much i paid for it over 20 years ago? I have refinanced a couple times for a better interest rate. Is that gonna make a difference? Some of the repairs to my property i did myself so I didn't have to pay as much out of the money I got. Is that gonna make a difference? I think that is all the questions I have. Please answer with detail without skipping anything. I always do taxes myself and want to get this right because once again, I don't want to pay anybody anything because the cost of anything is way too high now.

CoryF

Giving you the answers you need is important to us. I have pasted your exact questions for my response.

Is this eminent domain, condemnation or easement sale?
Yes, this is eminent domain. Your initial posts were unclear so advice was given for other options.

What is the cost basis of my property? How much i paid for it over 20 years ago?
Your land basis is what you paid for it originally. The refinancing doesn't or shouldn't change the value.

Scbdude

https://community.freetaxusa.com/discussion/comment/3804#Comment_3804

Thank you Cory. Im understanding this much better now. I thought I was good at taxes til this came up. So a couple more quick questions. I can clearly see that my taxes will not be affected too much from this. So for future sheltering from capital gains tax is it better to have a higher or lower cost basis? And over the past 20 years since I bought my house a lot of things have changed. What are things over the past 20 years that may have affected my cost basis whether for the good or for the bad and I can **** through some things and decide if they really happened or not if you know what I mean? And thank you again for your time and assistance. It is a tremendous help and I am learning from it. That's always a plus.

CoryF

You are welcome.

Generally a higher basis would reduce the Capital Gain when the property is sold. Capital Gain is realized by calculating the Sales Price (subtracting selling expenses) minus the Cost Basis.