Tax’s question.

Here’s the gig…We’ve lived in our home for 5 years now. Last year the city “needed” a good chunk of our road front property for a new bike path. We were awarded(court) reimbursment. Do we need to pay taxes on the proceeds from this transaction?? We did recieve a 1099-S.

BIRDDOG

If you recieved a 1099 you will probably need to pay. Check with your tax guy for sure. If so you may be able to reinvest the preceeds and not pay.

Check with a true tax guy for sure. (I am not)

If you sold real estate that you have owned for over 2 years, you should not have to pay any tax on that money.

BUT!!!!!!!
I’m not a tax man………call your tax guy and if you need one I can assist you with some good people.

BTW are you heading up to CH on monday? You may want to take a look at the new project. Looks like more taxs next year.

This is new to me (only been in the business a few years) but I think it is a taxable transaction. See Page One, Column One, at the bottom regarding Involuntary Conversion.

http://www.unclefed.com/IRS-Forms/2006/i1099s.pdf

I will do some more searching and let you know.

I am an accounting clerk, In my opinion yes you will have to pay tax on your reimbursement. Due to the fact the govoerment has sent you the form for it I would think they want their money. It might be considered income. I would double check with a tax service, just to make sure. There might be a clause that in the agreement that would affect the amount of the tax rate.
Due check on, you don’t want any problems with the IRS.
whiskey Girl

Tell them to pound sand! They devalued your property with that crummie bike path anyway.

(Whatever you do don’t mention my name , I got enough trouble already.)

Like the others have said, check with somebody who knows. Good Luck

I will try to shed some light on this for you Birddog. I am an Accountant/Enrolled Agent and Partner in our firm in Nebraska.

This is a taxable transaction to you. You will need to report the income on Schedule D, which would be long term capital gain. However, you may be able to reduce the taxable gain by allocating your basis to the portion that was “sold.” If this is done (rightfully so) you will need to document the reduction in basis to the remaining land/house.

Gary mentioned that you would not have to pay tax due to owning the real estate for 2 years. This is not accurate information. The exclusion he is referring to is for a principal residence only. There are other requirements also, but the exclusion is up to $250,000 gain for a single person and $500,000 gain for a Married Filing Joint return. There are numerous court decisions that have disallowed the exclusion for the sale of property adjacent to a principal residence (which is what this sounds like.) That being said, there is a possibility that you still could exclude the gain. If you would happen to sell the house within 2 year (before or after), both sales could be considered qualifying for the purpose of the exclusion and you could amend the return where tax was paid on the first sale.

As far as reinvesting the money to not pay, technically, yes it is possible. However, you may be too late and/or you may have done something to not qualify. This is a “Like-Kind Exchange.” There are very strict timing requirements that must be met in order to qualify. You must also not have had access to the money yet. If you have received the check already, the exchange would fail. The money must go into an escrow account and the new property must be identified within 45 days and you must close on the new property within 180 days. No exceptions.

Now for the good news…As I said above, this transaction should be reported on Schedule D and would result in Long Term Capital Gain. The tax rate would be 5% if you are in either the 10 or 15% tax bracket. The rate would be 15% if you are in the 25% bracket or higher.

If you have other questions, you can PM me and I can answer them or give you my office number for you to call.

JD

Bird Dog,
Everything JD has said sounds exactly correct based on what we had to pay when we sold a lot (had it for more than 2 years) in Wisconsin 2 years ago. The only thing I would add is when he says your capital gains tax rate would be 15%, that refers to the Federal tax rate. Don’t forget to find out about the State tax. We did. It won’t be nearly as much, but their going to want a cut too. Unless there is something unique about your situation verses selling a preexisting stand alone lot. Good luck.

Bzzzaw,

You are exactly right as far as state Income tax. I just don’t prepare a lot of Minnesota returns and didn’t know that tax rate structure and/or if there is an exception to real estate transactions without looking it up. For those reasons, I was silent on the state…but you should look into it, definitely.

JD

JD;
That is GREAT information and thank you for clarifying and taking the time to post this!!!!

THANKS!

Is this the Commerce Clearing House (CCH) website?

This is why I come here…friends helping friends!!!

Nope, even better than CCH. Just your friendly neighborhood Tax-Man.

Gary, not a problem. Didn’t mean to call you out, but I had to correct the misinformation. There is enough incorrect info floating around out there and I figure if I correct it, perhaps that will get back to my clients rather than just the incorrect.

JD

JD;
You didn’t call me out at all! That is why I will always tell people to talk to a tax professional. I only knew there was some form of tax releif in owning property over a course of time.

Thanks guys, some good info here! I think it’s time to go see the tax man.

BIRDDOG

A quick note. Call the IRS regarding your question if it involves Federal Taxes. Ironically, they have been very helpful to me on a number of different issues.

I believe you live in Holmen and as for Wisconsin, I don’t think a great deal of those folks, but give them a call also. Maybe you will be fortunate enough to talk to someone that can accurately answer your questions.

Good luck and let us know how it goes.

Bird Dog,

sorry about the Wisconsin response. Hopefully, the people in Minnesota will be more helpful then the folks I have dealt with in Wisconsin.

As for the IRS, they have been good on my end.

Birddocg: Just like the pros said is right on the schedule D and capital gains. I just went through this last year on condemnation with the state DOT stealing my land for a road improvement. You only need to pay on the value of the land taken though. Other severance damages are not included.

Quote:

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A quick note. Call the IRS regarding your question if it involves Federal Taxes. Ironically, they have been very helpful to me on a number of different issues.

I believe you live in Holmen and as for Wisconsin, I don’t think a great deal of those folks, but give them a call also. Maybe you will be fortunate enough to talk to someone that can accurately answer your questions.

Good luck and let us know how it goes.

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Not to discourage calling the IRS, but be prepared to put on hold. Also, a couple of years ago, an internal audit of the IRS telephone service showed an accuracy of about 40%. Be careful if you’re in the 60% because claiming you relied on the IRS advice will not necessarily get you out of tax/penalty/interest.

My advice is to contact a reputable preparer (this means probably not H&R block.)

JD

JD,

the hold stuff I have not had a problem with here in SE Wisconsin. However, you are probably right about accuracy, albeit with the tougher questions they just forward me to someone else and I get the name of the person I am talking to.

Frankly, most of the so-called accountants are no better, but that is just based on my personal experience.

Sgt.
So, we shouldn’t have to pay the tax on things such as trees? We were compensated for 7 large pines. Or would that be considered part of the land? We were also compensated for what you could call inconvenience as our driveway’s were ripped up for a year, couldn’t get the boat through the mud drive, fence was ripped down, couldn’t let our dogs run free, etc… We won’t pay on that?

The vibe I’m getting is that we should only have to pay tax’s on the market value of the square footage they took??
If that’s the case, and I hope it is, we have some digging to do as I don’t recall the compensation being broke down into separate “categories” like land value, trees, inconvenience, etc…

I thank all you guys for giving us the heads up on this subject, it’s been a big help!! This is what makes IDA so great, doesn’t matter the question, someone here knows the answers.

BIRDDOG

This is some GREAT information. I just hope there won’t be a test to go with it.

Yep that is correct. I had the same thing with lost trees and general destruction. My settlement had a letter from the DOT that stated land value acquired and trees value and temporary easement etc. Only the actual land was taxable. Amounted to much less than the total. Originally the County sent me a 1099 for the total settlement. I contacted the State Attorney General office because I went to court over the condemanation (DOT couldn’t talk to me anymore) and they told me to contact the County. I called up and the woman said she had no information and was just told to send it out. She agreed it was for land value only. I said I have a letter stating the amount and did she need a copy. Her answer was no just give me the amount and I’ll send out a corrected copy. Also had a neighbor that got a settlement but sold no land. They paid nothing in taxes. I’m not an accountant but I do my own taxes. I used the IRS web site and got alot of info on how to file correctly with the schedule D capital gains and the forced sale of land due to condemnation. Hope this helps.

Sgt.

Thanks! This is the info we need, helps a ton!!

BIRDDOG