Imminent Domain income

[snowshoe]

Because no one else knows what to call it- I believe it's an Imminent Domain issue. Not much of an issue, however, there is some disagreement between about how to handle proceeds. Municipality widened the street & paid some homeowners for the portion of their front yard/property that was used in the project. I had not had experience with this, however, my research said that this IS income & taxable portion is figured by using sf of the entire property & sf of 'purchased portion' & figuring the cost of that 'purchased portion'. So, proceeds minus cost of land (& improvements if applicable) equals taxable income. Is this correct or am I missing something?

This made sense to me, however, a client of mine was told that this is incorrect & this other preparer 'redid' them. Meanwhile has also told clients that received same payment- that I was wrong & that it is NOT taxable income. I need to be ready to apologize & amend or have some documentation to show that I reported correctly.

[TaxGuyBill]

If the property was sold and your client does not own it AT ALL, you seem to be correct (well, with maybe the option to defer/transfer the gain if they purchase replacement property within two years, but the doesn't seem to apply in this case).

But often things like this could be an 'easement', where the government bought the right to use it for something, but for other purposes it is still considered your land. In those situations, the payment is not income but decreases the Basis of that land (if the payment is larger than the Basis of that land, the excess would be taxable).

So you probably need to find out exactly what was done and what the payment was for. To me, widening the road would SEEM to be an outright purchase rather than an easement, but that is only my guess - you would need to find out.

[terryats]

This is from pub 544 "Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. You report the gain or deduct the loss on your tax return for the year you realize it." Would have to research more, but offhand I believe If your client no longer owns any part of section sold, he would qualify for section 121

[TaxGuyBill]

he would qualify for section 121

The sale of "vacant land" would only qualify for the ?121 exclusion if the home itself is sold within 2 years.

[terryats]

Your absolutely right Bill, thanks for pointing that out

[Snaggletooth]

If the portion of he yard was "sold":

Does the entire residence need to be sold to qualify for the s.121 exclusion? or can it apply to a portion of the residence (such as part of the front yard)?

[Lion]

What TaxGuyBill said. See "Vacant land next to home" to start your research: https://www.irs.gov/publications/p52...blink100073092

[Snaggletooth]

Good link, Lion. Thank you.

[snowshoe]

Thank you awesome people! The homes and properties are still retained by owners- just the strip along front yard was purchased for road widening project. So, I still feel like I did appropriate research & correct reporting. I'm kinda bummed that I had someone (an in-law) telling my clients that I was incorrect & therefore they paid taxes that weren't required. Being correct is my highest priority though!