Sale of Biz Property

[S T]

T/p has Biz Property - the city approached him to acquire part (land only) for an easement that the City needed/wanted to expand the Freeway Ingress/Egress.

Along with that - there would have to be numerous repairs to the landscaping - new retaining walls, replace trees/shrubs, etc. - amount was based on quotes that the T/P acquired during negotiations.

Escrow was allocated so much for the purchase and so much for "curative repairs"

I know how to report the purchase of the the allocated land portion (Capital Gain/Loss)- but how do I treat the amount received for "curative repairs"

Transaction was late in 2010, so t/p had No time to spend any of the money for the "curative repairs"
Thanks,

Sandy

[Gary2]

See Pub. 544, Chapter 1, under Involuntary Conversions, specifically "Severance damages" on page 7 and "Postponing gain on severance damages" on page 8. Also see "Changing your mind" on page 11 - since you can choose to report gain now and change your mind to postpone it by amending at a later date, if the requirements are met. Come to think of it, reading the entire section on involuntary conversions (pages 6 to 11) is a good idea.

Note that I'm jumping to some very big conclusions in directing you here. It's your responsibility to ensure this conclusions are correct. Specifically: Was it really involuntary, i.e., was there a real threat of exercising eminent domain, or was it simply an option that the city was exploring? (For a freeway, it probably was. In my community, local politics mean the towns almost never do a taking unless the owner agrees.) If it was really voluntary, then there's no postponement of gain.

Second, are "curative repairs" equivalent to "severance damages"? It sounds like it from your description, but you need to be sure.

Third, if you decide that it really was involuntary and really was severance damages, then you need to be precise on which actual expenses were made for the identified curative repairs (probably with some reasonable slack for unanticipated but clearly related expenses), and which, if any, were made because it was convenient but weren't related to the taking.

There may be other issues to investigate.

[S T]

It was a voluntary transaction.

Sandy

[S T]

Would the entire $$ Received

Be treated as reported on Sched 4797 (entire property is a Biz Rental) and since land no depreciation - Bldge leased is on part of the property and this portion that the City purchased is just vacant landscaped area.

Or is Schedule D a possibility ????

Sandy

[WhiteOleander]

I could be wrong, but I thought the payment for the easement could be taken against the basis of the property. So, until the basis is used up, the compensation received is not a taxable event.

[Gary2]

If it's 100% business property, and there's a gain or loss, it's starts on 4797 (but may carry to Sch. D if a sole proprietorship). Since it's just an easement and not a sale, there may not be any gain to report. See the explanation on page 3 of Pub. 544 for easements. It's tempting to apply the proceeds to the entire property, because it's easier, but that may not be the best way to go about it, particularly given current capital gains tax rates.

If you're sure it's voluntary, then it's too late to do anything about postponing gain. If there really is gain to recognize (as oppose to just basis adjustment), then this is worth a bit of extra effort. Remember that it doesn't have to be an actual condemnation, just threat of condemnation. Pub. 544 phrases this as "You must have reasonable grounds to believe that if you do not sell voluntarily, your property will be condemned." It gives some examples of what actions might constitute threat of condemnation.

As for the curative repairs, if you're still sure it can't be treated as threat of condemnation, then I'm not sure if they can be treated as capital (i.e. reduction in basis) or ordinary (i.e. current income). The landscaping improvements, when they're done, are almost certainly capital, 15 year recovery period, due to the trees and retaining wall.

Perhaps someone else can comment on whether the curative repairs portion would have to be treated as ordinary income.

[S T]

Treated

It was treated as a Sale and recorded as such - we have a 1099S- for the entire amount, the escrow settlement shows the breakdown between the land-real estate and the curative repair amount.

Sandy

[Gary2]

It was treated as a Sale and recorded as such - we have a 1099S- for the entire amount, the escrow settlement shows the breakdown between the land-real estate and the curative repair amount.

What does the deed show?

[S T]

Sale

It is most definetly a sale - Deed recorded showing .065 acres to City and T/p new deed less sq ft than original deed - so property tax assessment will also be reduced.

So I have $ 88,000 allocated to sale of the .065 Acres (land area - no improvements other than lawn covering on this .065 Acres
and $ 168,000 allocated to curative work, that can not begin until the City completes their construction, which they now 10 months later have started.

The property is Commercial Bldg that is a Self- Rental to a Biz Partnership - outlying areas are just vacant with landscaping.

So not sure how to report on the T/p personal return, where the self-rental is reported.

Thanks everyone for your assistance on this - as I have never had to deal with this.

Sandy

[S T]

???

So all reported on Form 4797 (1040 Form)????
Transaction having to do with Land - So Part I??? for the entire amount??

Any thoughts or guidance - I am out of time

Thanks

Sandy

[Gary2]

It sounds like an outright sale of business use land. It's neither 1245 nor 1250 since land isn't depreciable. Start in part III, then carry to part I. If there are prior year nonrecaptured 1231 losses, you'll recapture them now. Any remaining gain carries from there to Sch. D.

[S T]

Thanks Gary - I will try that and see how my software handles

Sandy