Eminent Domain Tax Questions

Takings in eminent domain raise important tax questions. For example:

(a) Capital Gains. Receipt of just compensation for a taking may give rise to a duty to pay capital gains taxes. Under Internal Revenue Code section 1033, such involuntary transfers in eminent domain are given special tax treatment. The gain may be deferred if like kind replacement property is timely found. The replacement must occur within three years of the date that a gain is realized for investment and business property, two years for other property. You should consult with your tax adviser or CPA to determine which time deadline applies and to determine what constitutes “like kind” property.

(b) Relocation Benefits. Under California Government Code section 7269, relocation benefits are NOT taxable as income.

(c) Property Taxes. The owners of taken property may transfer their property tax basis from the property taken to a new replacement property. In the recent case of Olive Lane Industrial Park, LLC v. County of San Diego (2014) 227 Cal.App.4th 1480, the California Court of Appeal held that, while this must be done within four years to obtain retroactive relief, the deadline did not apply to obtaining prospective future relief. Again, you should consult your tax advisers regarding these deadlines, and act promptly to apply for a transfer.

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