With the 2016 tax season wrapping up and new public works projects popping up around every corner, now is as good a time as any to discuss how eminent domain affects your taxes. Below are the most common questions property owners have about taxes when their property is being assessed for a government taking.
Do I have to pay capital gains tax on my property sale to the government?
Unlike conventional property sales, eminent domain takings are considered “involuntary conversions” by the Internal Revenue Service and therefore have different tax obligations. In a traditional sale, if you sell your home for an amount substantially higher than what you purchased it for, you may have to pay taxes on the difference.
In an eminent domain sale, you do not have to pay taxes on that money as long as you use it to buy a similar parcel of property. The government considers this a deferred gain. You have a limited amount of time to purchase this property, however, so it is best to consult with an attorney sooner rather than later.
Will I have to give up my tax basis that I currently have?
Landowners are often concerned that they will lose the tax basis they have under Proposition 13, an initiative that capped property tax inflation for long-term homeowners. The state recognizes the potential tax consequences of buying a new home at a much higher tax rate and grants relief to homeowners facing eminent domain. The state will provide you with a worksheet to estimate your total tax relief. An important thing to keep in mind is that there are time limits you must meet in order to receive this tax relief. As with everything in these proceedings, time is of the essence.
Are relocation benefits taxable?
No. The money you receive for your relocation costs is not taxable.
An attorney can help you work through the details
Eminent domain actions are complicated, with quite a few moving parts. By working with an attorney, you ensure that your rights are protected during every step in the process, including your right to tax relief.