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Old 03-14-2017, 11:25 AM
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Gain from Partial Condemnation of Primary Residence

Hello everyone!

Not sure how to properly handle the following situation that results in a substantial gain:

> Received a 1099-S for $120k of proceeds from an eminent domain seizure.
> The seizure was for 0.25 acres of property that was a part of the front yard of the main home. Full property is 3 acres + home.
> Paid $30k in legal fees related to getting the reward.
> The adjusted cost basis in the 0.25 acres is $10k.
> Have lived in the home for 12 years
> There will be significant work to restore the property to its original state after the county finishes their work. Estimate is at least $50k but could be more.

This results in a 2016 net long term capital gain of $80k ($120 - $30 - $10)

With all this in mind does the sale of your principal residence exclusion apply to this case since the home is still intact and will continue to be the main residence? If it does can you point me to the proper tax code or IRS bulletin/publication? I can't seem to find much on a partial condemnation!

If the exclusion doesn't apply I guess I will have to go the postponement of gain route to buy time to rehab the property.

Thank you!



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Old 03-14-2017, 02:52 PM
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Join Date: Oct 2010
Posts: 4,801
Quote:
Originally Posted by jrm43210 View Post
Hello everyone!

Not sure how to properly handle the following situation that results in a substantial gain:

> Received a 1099-S for $120k of proceeds from an eminent domain seizure.
> The seizure was for 0.25 acres of property that was a part of the front yard of the main home. Full property is 3 acres + home.
> Paid $30k in legal fees related to getting the reward.
> The adjusted cost basis in the 0.25 acres is $10k.
> Have lived in the home for 12 years
> There will be significant work to restore the property to its original state after the county finishes their work. Estimate is at least $50k but could be more.

This results in a 2016 net long term capital gain of $80k ($120 - $30 - $10)

With all this in mind does the sale of your principal residence exclusion apply to this case since the home is still intact and will continue to be the main residence? If it does can you point me to the proper tax code or IRS bulletin/publication? I can't seem to find much on a partial condemnation!

If the exclusion doesn't apply I guess I will have to go the postponement of gain route to buy time to rehab the property.

Thank you!
With all this in mind does the sale of your principal residence exclusion apply to this case since the home is still intact and will continue to be the main residence?======>> Because this is your home, if you meet the IRS requirements of owning and using the property as your main home for a period totaling 2 years out of the past 5, you may qualify to exclude up to $250k of the gain from your income or $500kif you file a joint return with your spouse If a gain results from the eminent domain it need not be recognized (you won't owe money) if the you replace the property within a specified period of time The replacement property MUST be similar or related in service or use to that involuntarily converted. So basically if you buy like property to replace what was taken by eminent domain you will not have any "gain" to be taxed on, but if you don't replace it with like property or don't buy property you will have a "gain" of whatever amount you got - just like it was an income and will have to pay tax on it.



If it does can you point me to the proper tax code or IRS bulletin/publication? I can't seem to find much on a partial condemnation! ========> The IRS considers this an involuntary conversion and there are special provisions in the tax code for these situations. The details and work sheets regarding the gain postponement are included in IRS Publication 544, Sales and Other Dispositions of Assets, so be sure to read all of the fine print before you proceed.An involuntary conversion can be the result of property being destroyed because of flooding, tornadoes and other natural disasters or, in other cases, if property is stolen, condemned or disposed of under the threat of condemnation. Generally, you can elect to postpone reporting the gain if you receive money and you buy qualifying replacement property within a certain time period.



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