Taxation- Tax Issue Identification

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Taxation- Tax Issue Identification

If the state or any other entity with the power of eminent domain condemns a privately

owned property, the owner should be awarded compensation for the value of the property taken.

Usually, the compensation is paid as the purchase price of the property condemned. Eminent

domain is defined as the exchange of the real estate title for compensation of the property

condemned.

The proceeds of the condemned property are usually subject to taxation whether the

owner of the property sells the peace of the land voluntarily or the land is taken by the

government under statutory condemnation procedure (Miller, 2).

Most cases of condemnation involve a portion of the owner’s property, for example in

this case the government condemns 10 acres of a 200 acres land to build a freeway. In this case

of a part-take, the owner is entitled to severance damages. Severance damages are calculated as

the difference between the value of the remaining property and the value after condemnation.

The severance damages are not taxable, but any damages leftovers are taxed. The owner of the

property can avoid any additional taxation on the damages leftovers, for example, the additional

payment of $30,000 by the government for the harmful effect auto exhaust by the machines by

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using section 1033 to regain the remaining balance or investing in another replacement

property(Small and Barnes, 6).

Any gain or loss realized in the event of condemnation of property is recognized for the

income taxes purposes the same way it would have been done in the event of a voluntary sale by

the owner (Miller, 3). Gain or loss is calculated as the difference between the net consideration

and the adjusted basis of the land condemned. In this case, there is a gain of $20,000 which is

subject to income tax.

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Work cited

Miller, Keith. "Land Condemnation-Federal Income Tax Consequences." Neb. L. Rev. 38

(1959): 507.

Barnes, A. James, and Jonathan A. Small. "Tax Treatment

of Condemnation Proceeds: An Analysis and Some Proposals for

Reform." Harv. J. on Legis. 4 (1966): 325.

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