Category Archives: Attorneys

Facing Eminent Domain and Relocation? Get the Best Help from Those that Get the Best Results

I had the great pleasure and experience with presenting a unique and customized approach to the eminent domain relocation process to the law firm, Sever/Storey, an eminent domain law firm for landowners. This energetic and collaborative group of attorneys quickly recognized how this unique relocation approach would benefit their landowner and business clients. Throughout my interaction with them, they clearly demonstrated their talent, energy, and commitment to provide the best and most complete service to their clients, which will undoubtedly provide the best results for their clients. If you are facing eminent domain or condemnation in Indiana, Illinois, Ohio, or North Carolina, you need to call Sever/Story at 888-318-3761.

Note: Martyn regularly speaks in many parts of the U.S. on relocation issues related to eminent domain, condemnation, and right-of-way to owners, businesses, and attorneys in group and private settings, as well as, to other professionals at continuing legal education seminars. Martyn can be reached at 425-398-5708.

Are Eminent Domain Relocation Payments a 1033 Tax Exchange or Not Considered Income?

Every year thousands of tax filers, and likely, their tax preparers, are dealing with tax issues on relocation payments received for relocating a business or household from public projects where the government agency is using eminent domain and condemnation. As an eminent domain relocation consultant, my clients frequently bring up tax issues related to relocation payments, or reimbursements. Based on their comments, some tax preparers treat relocation payments as a 1033 exchange; some treat them as non-income; while others treat them as ordinary income.

Answers to tax issues related to relocation payments have been eluding me for 15 years. A few years back I called the IRS for answers. After nearly an hour on the phone with the agent grasping for answers, but not finding any, I heard a sneeze and a click. I was “accidently” disconnected. More recently, I quizzed nearly everyone I know working in the eminent domain field for a connection to someone that knows, only to find leads to dead ends. Now, I’m broadening my search for answers by posting this on my website. Hopefully you or someone you know and trust will offer answers to some long-sought after questions.

Below are quotes from the Federal Uniform Relocation and Acquisition Act (URA) and the IRS, which cause me and others to ask more questions. I included an example of a project raising specific tax questions, and lastly are some common questions I’ve heard over many years from many clients.

All relocation programs for public projects using federal funding are based on the (URA) and include the following language, “No relocation payment received by a displaced person under this part shall be considered as income for the purpose of the Internal Revenue Code of 1954, which has been redesignated as the Internal Revenue Code of 1986 (Title 2, U.S. Code).” This leads to the IRS code which states, “42 USC § 4636 – PAYMENTS NOT TO BE CONSIDERED AS INCOME FOR REVENUE PURPOSES OR FOR ELIGIBILITY FOR ASSISTANCE UNDER SOCIAL SECURITY ACT OR OTHER FEDERAL LAW.” The language in these two items would lead one to believe that relocation payments are not income and therefore non-taxable.

Following is a brief, common, and recent example of a situation that further complicates this issue. On a public project using eminent domain and following the URA, we argued that certain pieces of equipment should be reclassified as personal property and eligible for relocation payments, which includes an optional payment for abandonment of the personal property. The public agency had earlier classified these items as immovable fixtures, which would leave the items ineligible for relocation payments, but eligible for lesser payments based on their depreciated real property value.

To emphasize the magnitude of this tax issue on a business, this client received a payment from the public agency for abandoning several million dollars’ worth of the reclassified personal property. Abandoning personal property is part of the relocation benefits program; therefore, these payments along with payments made for relocating other personal property are considered relocation payments. Taking the language from the URA and IRS at face value, one could believe these payments are not considered as income, thus non-taxable. Is that a reasonable belief?

The tax issues for relocation payments raises some common concerns and questions, such as; treating relocation payments as a 1033 exchange leaves the possibility of a taxable event in the future, which seems contrary to the IRS code mentioned above. In addition, personal property does not seem to fit within the scope of the 1033 exchange. For tax purposes, should payments for abandoned personal property be treated different from relocated personal property, even though both payments are considered relocation payments and presumably non-taxable?

We spend a lot of time analyzing and planning to improve the outcome of our client’s relocation efforts, however, tax planning has been a missing component within those efforts. Unfortunately, I do not have the needed tax answers, and I would like to point these clients to someone who knows.

For Eminent domain relocation payments and taxes, please see our follow-up posting at

http://eminentdomainandbusinessrelocationconsulting.com/?p=1696

Relocation Assistance Programs are Not Limited as Suggested

A statement mentioned in this article, http://peekskill.patch.com/articles/crossroad-tenants-speak-out-against-eminent-domain , regarding business relocation cost reimbursements being limited to $25,000 is a misconception. Any statement that says a business or resident is limited to some total dollar figure for relocation reimbursements is always a misstatement or a misunderstanding, which I regularly have to dispel.

As a relocation consultant for businesses and residents, who lives and breathes eminent domain and Relocation Assistance Programs around the U.S, I will clarify this misconception that there is a maximum amount of eligible relocation cost reimbursements for relocating a business. If a state or local public agency’s relocation program closely follows the Federal Relocation Assistance Program, which most do, it contains only two categories having a maximum amount of relocation cost reimbursements, or a cap. The remaining eligible categories are uncapped, so they have no dollar limits.

While using relocation programs that are based on the Federal Relocation Assistance Program along with its capped and uncapped eligible reimbursement categories, seldom have I seen small business relocation reimbursements total under $50,000, in fact they are often between $100,000 and $200,000. Larger, more industrial types of businesses can reach into the millions of dollars in relocation cost reimbursements. Reimbursements mostly depend on what the business has at the old location and how the business sets up at the new location.

Businesses, as well as, residents can do better than most people think when facing eminent domain and relocation. However, many otherwise eligible relocation cost reimbursements are too often overlooked and go unreimbursed. Many more costs can be eligible for reimbursement and can be paid with proper planning, proper understanding of the Relocation Assistance Program, and with well-prepared relocation claims. So, don’t be discouraged by false statements that businesses are limited to relocation reimbursements of $25,000, $50,000, or any limiting figure.

Martyn Daniel

It Pays (Well!) to Submit Actual Cost Items for Relocating Businesses

MoneyIn my last blog post, “An Overview of Capped Actual Cost Items for Business Owners Affected by Eminent Domain” I discussed two reimbursement options available to business owners who must relocate due to eminent domain; lump sum and actual cost.

The lump sum amount is a rather simple process for the business owner.  He/she simply accepts the $20k[1] available for relocation and ‘calls it a day’.  No other claims processing is needed. Hopefully, the business owner has cash reserves available in addition to the $20k because rarely does a full relocation of a business fall within that dollar amount.

I am often asked by business owners, “$20k (or whatever the capped amount may be) sounds like a lot of money. Why would I want to go through the trouble of calculating actual costs?”

While $20k may sound like a lot of money a business owner can benefit 100 fold or more through actual cost accounting.  Business owners can relocate to a better location and some often upgrade their equipment while previously that might not have been possible. Further, a business owner can include the services of a relocation consultant in their process where the professional costs will be reimbursed as well.  Note: Preparation of claims is not a reimbursable expense, but planning for claims is reimbursable.

But that is really just the ‘tip of the iceberg’ for the business owner who benefits from actual cost reimbursement.

For example, I worked with a pharmacy owner who chose not to accept the lump sum payment.  Line item costs for a handful of reimbursement amounts which the pharmacy owner received are as follows:

Pharmacy Relocation Reimbursements        

  1. Transportation of Personal Property – $27,000
  2. Packing , crating, unpacking, uncrating of Personal Property – Included above  
  3. Disconnecting, dismantling, removing, reassembling, and reinstalling equipment, machinery, and other personal property – $72,000
  4. Professional services for planning , moving, and  reinstalling the personal property – $15,200
  5. Re-lettering signs and replacing  printed materials made  obsolete  by the move – $8,000
  6. Purchase of substitute personal property. $34,000
  7. Searching  for a replacement location (Maximum $2,500) – $2,500Note that there are 27 line items the agency will consider for reimbursement.  I have just listed 7 items which more than exceeds the $20k the owner might have received if he had taken the lump sum.

So I ask, “If your business needed to relocate due to eminent domain, would you take the lump sum offered by the agency or would you consider working with a business relocation consultant to reap the best benefit from your move?”

I offer proof.

My next blog post will indicate the reimbursement for a company with 50+ employees.

 Martyn Daniel
www.EminentDomainandBusinessRelocationConsulting.com


[1]   If a business owner chooses to be reimbursed using actual cost as the basis for the claims reimbursement, bear in mind, though that some expenses are capped.

Note that a $10,000 cap on the category referred to as Reestablishment is the minimum set by the Federal Relocation Guidelines. Some states have higher amounts, some are at $50k or higher, and a few are unlimited. Link to a state-by-state relocation listing here.

In the state of WA, where I often practice eminent domain and business relocation consulting, the Lump Sum cap is $20k.

An Overview of Capped Actual Cost Items for Business Owners Affected by Eminent Domain

In my last blog post entitled, “Would You Choose Lump Sum or Actual Cost Relocation Reimbursement? I discussed two reimbursement options available to business owners who must relocated due to eminent domain; lump sum and actual cost.

If a business owner chooses to be reimbursed using actual cost as the basis for the claims, some expenses are capped.

Capped Expenses: Reestablishment (maximum $10,000):

Note that the $10,000 cap mentioned above is the minimum set by the Federal Relocation Guidelines. Some states have higher amounts, some are at $50k or higher, and a few are unlimited. Link to a state-by-state relocation listing here.

1. Repairs or improvement to the replacement property as required by law or code

2. Modification to the replacement property to enable the business to operate

3. Construction and installation of new signage to advertise the business

4. Redecoration or replacement of soiled or worn surfaces such as carpeting, paint, paneling

5. Advertisement of the replacement location

6. Increased cost of operations for two years

7. Other items considered essential to the reestablishment of the business

Since an eminent domain and business relocation consultant’s services are an eligible cost when opting for the actual cost for a planned relocation, the capped items listed above are where a consultant’s expertise is important.

For example, #2 – capped within the $10,000 (depending on your state or location) is ‘modification to the replacement property to enable the business to operate’.  A consultant with construction experience can suggest modifications which are contained within that reimbursement amount.

On the other hand, a business owner may simply look at a replacement property (if he even has the time to search for properties) and believe that hefty modifications leading to out-of-pocket expenses is the only solution to enable the business to operate.

Can you see why an eminent domain and business relocation consultant’s services are absolutely necessary to the seamless transition in an eminent domain move?

In my next blog post, I will compare actual cost estimates for relocation for small businesses versus acceptance of the lump sum.

Do you have any questions about the capped amount in your state?

Would You Choose Lump Sum or Actual Cost Relocation Reimbursement?

Under Relocation Guidelines featured on my site by state, business owners who must relocate due to eminent domain can choose to receive benefits from the government agency one of two ways.

1) Lump Sum Payment – up to $20,000 based on income

2) Actual Cost Relocation – based on actual eligible costs, some of which are capped.

Lump Sum Payment

Business owners can receive a lump sum or a fixed payment of up to $20,000 and call it a day.  The business owner will move themselves and no other claims can be submitted to the agency for reimbursement.

So if it costs the business owner $300,000 to relocate machinery, office equipment, parts, furniture for example, along with setting up of computers, telephones, heating and air conditioning, the business owner will pay-out-of-pocket for anything over and above the $20,000 amount.

In this example this amount would be $280,000.

In a cash-strapped economy, any out-of-pocket expenses could make or break a business.

Actual Cost Relocation

The following expenses can be reimbursed to the business owner based on the individual and actual costs of the move.

Moving (no maximum amount with one exception):

1. Transportation of Personal Property

2. Packing, crating, unpacking, uncrating of Personal Property

3. Disconnecting, dismantling, removing, reassembling, and reinstalling equipment, machinery, and other personal property

4. Storage of personal property up to 12 months

5. Insurance for the replacement value of personal property during the move and necessary storage

6. Any license, permit, or certification required at the replacement site, which the business had at the displacement location

7. Replacement value of property lost, stolen, or damaged during the move

8. Professional services for planning, moving, and reinstalling the personal property

9. Re-lettering signs and replacing printed materials made obsolete by the move

  • Stationery
  • Notification of the move

10. Actual direct loss of tangible personal property

11. Reasonable cost incurred trying to sell and item that is not to be relocated

12. Purchase of substitute personal property.

13. Searching for a replacement location (Maximum $2,500)

14. Costs to secure professional move bids

15. Low Value/High Bulk

16. Disposal of personal property and hazardous materials

If a business owner does not opt for the lump sum payment and chooses to be reimbursed via actual costs, there are a few expenses which are capped. My next blog will explain and list these items.

If your company has to move due to eminent domain, which option would you choose? Contact Martyn Daniel, Eminent Domain and Business Relocation Consultant to help you answer that question.

 

Land Use Attorneys Should Work With Eminent Domain Consultants

As reported on the land attorney blog of Waldo and Lyle, PC law http://www.emdomain.com/index.html , “Small Business Owner Stands Up to Condemning Authority . . . and Wins”, Charles Andrews of Virginia, owner of Downtown Used Auto Parts received good news in 2006 that the Supreme Court denied Virginia’s Norfolk Redevelopment and Housing Authority (NRHA) the right to condemn his property for use as a parking lot for employees of an adjacent Coca-Cola plant.  http://www.emdomain.com/Editorials/small/small.html
Andrews’ did not accept the land valuation offer in his eminent domain case. “One of the reasons Andrews rejected NRHA’s offer was NRHA’s refusal to compensate Andrews for the going business, despite the fact that it could not be relocated.”

A common misconception of eminent domain is that businesses must take the offer the government makes for property or else the business owner will not receive anything at all.

Although NRHA had offered to purchase the property, Andrews refused to sell.

In December of 1999, NRHA sent C & C Real Estate (Andrew’s company) a letter stating NRHA’s intent to acquire the property. Andrews was dismayed. “If you look at that letter you get, the way they write it sounds like you don’t have any options. Your option is nothing! They tell you what they’re gonna do. They tell you they’re going to take your property and they’re going to relocate you. They don’t want to do that. They didn’t even want us in the city,” he said.

Andrews was fortunate. After one and a half years of legal proceedings the Judge ruled that the NHRA was not authorized to condemn.

And although his salvage business could not be relocated, in cases where a business can be relocated, there are only two choices; a standard relocation option or a planned option.

Andrews’ attorneys might have advised him to accept either the standard government relocation or an amount based on income no greater than $20,000. Or Andrews might have worked with an eminent domain consultant to review specific relocation line items. The latter would allow for relocation costs to be reimbursed at a much higher rate.

Anytime a property can be relocated, land attorneys should consider working closely with an eminent domain relocation specialist for a planned relocation. While the attorney is handling the legal aspects of the case, the consultant can respond to the submission of relocation claims, many of which are not capped; the exception being the search for a relocation site at reimbursed at $2,500 and reestablishment costs which vary by state from a maximum of $10,000 to unlimited. All other planned relocation line items must be reasonable in cost and have supported information to be approved by the relocation agency.

The Waldo and Lyle Law firm states, “We work with experienced eminent domain appraisers, real estate professionals, engineers, traffic consultants, economists, soil experts, environmental scientists, land planners and other experts to develop and prove our client’s case. Whether we are helping a property owner protect her home, a church protect its property, or a commercial or industrial owner protect its business assets, we have the experience to represent successfully the property owner.”

Martyn L. Daniel, Eminent Domain and Business Relocation Consultant

 

What is a 1031 or 1033 Tax Exchange?

This tax expert’s article below provides a good distinction and clarification on how to handle tax issues related to real property situations.  It does not describe how to handle eminent domain relocation payments, where many of our clients have questions.  Relocation payments, within eminent domain and condemnation, are mostly related to personal property and other expenses for relocating a business or household.  We are continuing our search for answers to tax related questions on relocation payments.  Please check back with us.

I look forward to your return.

For Eminent domain relocation payments and taxes, please see our posting at

http://eminentdomainandbusinessrelocationconsulting.com/?p=1696

Regards,

Martyn

 

After years of conducting tens of thousands of successful 1031 exchanges, we found that there are a number of frequently asked questions related to this type of transaction…

Equity and Gain

Is my tax based on my equity or my taxable gain?

Tax is calculated upon the taxable gain. Gain and equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation which has been previously reported, then add the value of any improvements which have been made to the property. The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.

Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

Yes, the gain will be totally deferred if you:

1) Purchase a replacement property which is equal to or greater in value than the net selling price of your relinquished (exchange) property, and
2) Move all equity from one property to the other.

Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

Yes, “like-kind” refers more to the type of investment than to the type of property. Think in terms of investment real estate for investment real estate, business assets for business assets, etc.

Simultaneous Exchange Pitfalls

Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?

While it may be possible, it may not be wise. With the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states, it is very difficult to close a simultaneous exchange without the benefit of either an intermediary or exchange agreement. Since two closing entities cannot hold the same exchange funds on the same day, serious constructive receipt and other legal issues arise for the Exchangor attempting such a simultaneous transaction. The addition of the intermediary Safe Harbor was an effort to abate the practice of attempting these marginal transactions. It is the view of most tax professionals that an exchange completed without an intermediary or an exchange agreement will not qualify for deferred gain treatment. And if already completed, the transaction would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. The investment in a qualified intermediary is insignificant in comparison to the tax risk associated with attempting an exchange, which could be easily disqualified.

Property Conversion

How long must I wait before I can convert an investment property into my personal residence?

A few years ago the Internal Revenue Service proposed a one-year holding period before investment property could be converted, sold or transferred. Congress never adopted this proposal, so therefore no definitive holding period exists currently. However, this should not be interpreted as an unwritten approval to convert investment property at any time. Because the one-year period clearly reflects the intent of the IRS, most tax practitioners advise their clients to hold property at least one year before converting it into a personal residence.

Remember, intent is very important. It should be your intention at the time of acquisition to hold the property for its productive use in a trade or business or for its investment potential.

Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

Involuntary conversion is addressed within Section 1033 of the Internal Revenue Code. If your property is converted involuntarily, the time frame for reinvestment is extended to 24 months from the end of the tax year in which the property was converted. You may also apply for a 12-month reinvestment extension.

Facilitators and Intermediaries

Is there a difference between facilitators?

Most definitely. As in any professional discipline, the capability of facilitators will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Facilitators and Fees

Should fees be a factor in selecting a facilitator?

Yes. However, they should be considered only after first determining each facilitator’s ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

The rules for personal residence rollovers were formerly found in Section 1034 of the Internal Revenue Code. You may remember that those rules dictated that you had to reinvest the proceeds from the sale of your personal residence within 24 months before or after the sale, and you had to acquire a property which reflected a value equal to or greater than the value of the residence sold. These rules were discontinued with the passage of the 1997 Tax Reform Act. Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 (married) of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is a key element of tax deferred exchanging, you may not exchange into property you already own.

Related Parties

May I exchange into a property that is being sold by a relative?

Yes. However, any exchange between related parties requires a two-year holding period for both parties.

Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes. Partial interests qualify for exchanging within the scope of Section 1031. However, if your interest is not in the property but actually an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excepted from Section 1031. But don’t be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat. Those individuals or groups owning partnership interests, who desire to complete an exchange and have for tax purposes made an election under IRC Section 761(a), can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! See elsewhere in this publication for more information. Then, only undertake this election with proper tax counsel and only with the election by all partners!

Reverse Exchanges

Are reverse exchanges considered legal?

Although reverse exchanges were deliberately omitted from Section 1031, they can still be accomplished with the aid of an experienced intermediary. Since reverses are considered an aggressive form of exchanging, your intermediary and tax advisor should assist you with exchange and tax planning based upon successful reverse exchange case law.

The Taxation Section of the American Bar Association has submitted suggested guidelines for the IRS in evaluating reverse exchanges and issuing new regulations. Although it is unknown when the IRS will make a definitive reverse exchange ruling, one is expected in the future.

Identification

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and there is absolutely no flexibility written into the rule and no extensions are available.

In a delayed exchange, is there any limit to property value when identifying by using the 200% rule?

Yes. Although you may identify any three properties of any value under the three property rule, when using the 200% rule there is a restriction. It is when identifying four or more properties, the total aggregate value of the properties identified must not exceed more than 200% of the value of the relinquished property.

An additional exception exists for those whose identification does not qualify under the three property or two hundred percent rules. The 95% exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired totals at least 95% of the properties identified.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. However, many times the escrow holder is not equipped to receive your identification if they have not yet opened an escrow. Therefore it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-day identification period.

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Disclaimer- Martyn L. Daniel represents both private parties and public agencies and provides these blog entries as a general overview on eminent domain related news.