Eminent domain sale question

[rocky551]

I've been using TurboTax for many years and would like to for 2022 also but have a strange situation that I don't know how to deal with. This year (2022) the county bought a piece of my land for a road construction project. It's the land that my home is on but out of about 10,000 square feet they bought only 800 sf by the road and compensated me for it. They didn't take the house or all of the property, just that piece by the road.  Is there any way to report this transaction in TurboTax and if so how? They gave me a check for the amount we agreed on. Thanks.

[Mike9241]

when you bought the property you bought the building and land. based on the acquisition cost at that time you would need to allocate the total cost between land and building.  then you would need to know the square footage of the land. unless you can justify a different allocation, you would allocate the  cost of the land sold

based on the ratio of sq footage sold to total sq footage.

there is a provision in the code to use the home sale exclusion for the gain on the sale of the vacant land but that requires the residence be sold within two years of the sale of the land - (reg 1.121-1(b)

also you must have owned the property and occupied the residence for at least any 2 years out of up to 5 years before sale, if married you would each be entitled to the exclusion if only one of you own the property for that period but both need to have occupied it for the 2 year period. next the home sale exclusion hasn't been used in the 2 years before this sale on a previous residence.

you can elect not to use the gain exclusion if you qualify by simply reporting the sale on form 8949 

[rocky551]

How would I determine the cost of the land vs. building?  My tax assessment shows what the city thinks the house and the land (separately) are worth but they have nothing to do with how much I paid. Do I just use that as formula and plug in the amount I paid and use the percantges that the city uses?  Also, where does the amount the county paid me come into play? What if it's more or less than the amount I've determined that the 800 sf is worth (based on what I paid for the property)? Finally, where do I find the place to enter this in TurboTax? I'm thinking more and more that this year I should just use an accountant. Thanks.

[Opus 17]

This is much simpler than Mike indicated.

The sale is not taxable.  You simply reduce your cost basis in your property.  For example, if you paid $100,000 for the land and the house, and the county paid $2000 for the strip used for the road, then your cost basis is now $98,000.  If and when you sell the property, your capital gains will be calculated from your adjusted basis rather than your original basis.

You don't have to know what the original "cost" of that strip of land was to determine a gain on the transaction, you just treat it as though they bought $2000 worth of your land for $2000, so there's no capital gain or loss, you just broke even (which is why it is not taxable).  And if they bought $2000 worth of your land (in my example) then the adjusted cost of your remaining land is reduced by the purchase price of the strip.  (If you sold your land next year for $150,000, then your profit would be $52,000 instead of $50,000, and that's where the tax comes in, if you owe any.  But you deal with it later.)

The only case where you would owe current tax is if the price paid for the strip was more than the total price you originally paid for the house and land. 

[rocky551]

Thanks.  So you're saying that I can just do my taxes normally this year (I use TurboTax) and not worry about this until I sell my house?  I imagine when I put the house up for sale I'll need to do a new survey because 800 sf at the curb no longer belong to me.  Thanks.

[Opus 17]

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@rocky551 wrote:

Thanks.  So you're saying that I can just do my taxes normally this year (I use TurboTax) and not worry about this until I sell my house?  I imagine when I put the house up for sale I'll need to do a new survey because 800 sf at the curb no longer belong to me.  Thanks.

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Well, if you receive tax paperwork, you may have to report the sale so the IRS doesn't send you a letter.  

If you got a 1099-S at the closing, that reports sale of property.  You would need to report the sale of land, use the data purchased and date sold.  For purchase price, use the same as the selling price so you have no gain or loss. 

If you received a 1099-MISC, you can list that under "other/miscellaneous income" and then create a separate item of other/misc income in the same amount but negative to offset it (zero it out) so it's not taxable, you can list a reason like "sale due to eminent domain for no gain."  Either way, you have zero taxable income so it won't change your tax.  And if you didn't get any kind of tax paperwork from the county, you would just ignore it on your tax return.

Whether or not you need a survey would be up to the buyer, I suppose.  (In both places I have bought homes, the survey is required by the buyer's mortgage lender so the buyer has to pay for it.)  

[rocky551]

I just received a 1099-S from the county last week.  So it sounds like as per your advice I have to report it.  If I'm not mistaken TurboTax does ask you if you've received a 1099-S.  I'll follow your instructions re:dates, costs, sale price, etc.  When I sell my house will I also have to use this info to determine the value of my property?  I don't think I need a new survey because when it comes time to sell the house the buyer will do that, but do I need to tell the town about this so they can adjust their records and the property taxes or do you think the county will notify the town?

[PattiF]

When you sell your house, you will deduct the amount that was paid for the strip of land from the basis of your house and land. For example, if the basis was $100,000 before you received $2,000 for the sale of the strip of land, the new basis would be $98,000.

It would be best for you to inform the property tax office in the town of the sale to make sure that they have the correct revised information.  You should receive a small tax break on your property taxes. The county may notify the tax office about the change in your property size.

@rocky551 

[Opus 17]

@rocky551 

The deed needs to be publicly, recorded wherever deeds are recorded in your area, usually the county clerks office. This creates a public record of the transaction so that, for example, if a buyer asks for a survey, when the surveyor goes to pull the property records, they will find the deed and be able to survey the new boundaries.  It is the buyer‘s responsibility to record the deed with the county and you probably don’t even have the right paperwork to do it yourself.  You could certainly go and double check. 

any locality that assesses property taxes on you may or may not get an updated record from the county, clerks office, and selling off the small strip of land may or may not change your property tax bill. You can certainly contact any assessor and inform them of the change to your property.