taxes

Like-kind property exchange rules

George Saenzq_v2.gifDear Tax Talk,
We received a settlement for $180,000 for 12,000 square feet of property, which was condemned for a 30-mph county road. Rather than purchase additional like property, we invested the money in infrastructure to service the property. (The county did not put this infrastructure in under the road, so we did it before this new road was paved.) The infrastructure we installed was sewer, water, gas, driveways, permits and engineering services.

Please confirm these investments qualify as like property under 1033 guidelines.
-- Craig

a_v2.gifDear Craig,
If you grant an easement on your property (for example, a right of way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation.

In calculating your gain on the sale of the 12,000-square-foot portion, you would allocate a portion of the original cost of the land and any improvements, such as a building. For example, if the portion that was taken is 10 percent of land that cost you $1 million, then your basis would be $100,000 and your gain would be $80,000.

You can postpone reporting gain from a condemnation if you buy replacement property.  To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property.

Your replacement property must be similar or related in service or use to the property it replaces. This is the same terminology that applies to like-kind exchanges under Section 1031. 

Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Because the infrastructure is considered land improvements, they would be like-kind and qualify as replacement property.

Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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