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See some of Saul Fenchel's eminent domain articles covering various subjects in Eminent Domain Condemnation.

What are the income tax implications?

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A condemnation is a taxable event at the time of vesting even if you do not receive money at the time of vesting. Section 1033 of the Internal Revenue Code of 1954, as amended, deals with "involuntary conversions" and affects re-investing of proceeds of the condemnation proceeding so as to accomplish a deferral of any capital gains.

There are strict time limitations under these sections! Immediate tax advice should be sought with respect to these matters and as to any other problems which may affect an owner as a result of the condemnation -- we emphasize -- at the time of taking. Do not wait until the award is actually received, which may be years thereafter.1

1As unfair, or even as irrational as it may seem, the taxable date or event is the date on which title “vested.” This is so even though it is highly unlikely that the property owner has received any money whatsoever as of that taking date and will probably not even receive money for months if not years afterward. Further, where a claim is filed the property owner will not know the ultimate amount of money to which it is entitled until years afterward. It is absolutely essential that upon the vesting of title the property owner must immediately consult with their accountant to determine how to treat this taxable event -- and it is absolutely imperative that however the property owner chooses to treat this taxable event (i.e., whether to defer or not) that the taking be reported in the year in which it occurred. Under no circumstances should you wait until money is received to actually report the transaction or to make any election or take any position under the Internal Revenue Code. It is strongly recommended that if the property owner (which is likely because of all the advance notice) becomes aware of an impending condemnation; that they consult with their accountant as to the appropriate way to address this taxable event.

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