Involuntary conversion / Imminent Domain Seizure of Commercial Property

[ND69]

I am trying to complete a 1065 (U.S. Return of Partnership Income) for an LLC using TurboTax Business.  The city where the commercial property is located exerted imminent domain and seized a portion of our property for a street project they were doing.  We were reimbursed for the seized portion of the property at current going rates, given a reimbursement for a temporary easement on part of the property which they required to complete the construction and a reimbursement for damage done to the landscaping on the property.  When I enquired, I was told the city does not issue 1099-S paperwork or anything else in this situation so we are on our own.  However, I do know the specific amounts assigned to the above categories.  How and where do I report/list these monies on the 1065 return using TurboTax Business?  I have looked but can’t seem to find categories to fit this stuff into.  Since this was just seizure of property and not of the building, I assume I do not have to worry about the depreciation schedules except for reducing the basis on the property itself by the amount of property permanently seized.  Is there anything else I need to worry about?  Thanks.

[PatriciaV · Accepted solution]

Yes, compensation for eminent domain seizure is reported as an Investment Sale. This is considered a sale because you have lost your ownership rights for the property.

In order to record the eminent domain payment properly, you have two choices:

1) You may allocate a portion of the adjusted basis in your property to the area taken by eminent domain as your basis for the sale. This could be acreage or square footage. This option will reduce a) the amount of capital gains on the sale and b) the basis of your property when it is sold in the future.

2) You may report zero cost-basis for the eminent domain property, which will make the entire proceeds from the sale subject to capital gains tax (generally 15% or 25%, depending on your tax bracket).

Under either option, the purchase date is the date you originally purchased the property.

The reimbursement for temporary use of your property is Miscellaneous Income (or Other Business Income). The amount reimbursed for landscaping would also be other income, offset by the cost of repairing/replacing the damage.

[ND69]

That should cover it.  Thanks for pointing me in the right direction.  The city did finally decide they would be issuing a 1099 but I still needed to know where to put the amounts.