For certain situations, the case of Karen Y. Nielsen v. Commissioner of Internal Revenue provides some answers for understanding how income taxes apply to eminent domain acquisition and relocation payments. As an eminent domain relocation consultant, not a tax advisor, I’ve prepared the analysis below based on the information from this case. This analysis and suggestions are for a typical acquisition of private property and relocation of a resident, business, non-profit, or farm located within a public project using eminent domain and federal funds to acquire property and relocate the occupants.
This case indicates that:
- The acquisition payments made for just compensation of real property may be taxable as a capital gain or deferred by use of IRC section 1033.
- Relocation payments are not considered income and not taxable.
That seems clear and simple. However, the key is to separate real property acquisition payments from relocation payments. When possible, it will be helpful to work with the public agency making the payments to clarify the type of payment being made. However, it may not be clear between the two types of payments, particularly when there was a settlement in mediation or court.
Moreover, it’s important to identify and properly classify movable fixtures (personal property) from non-movable fixtures (real property). It’s preferable to do this before the move and before relocation payments are made. I’ve spent a great deal of time making these distinctions for relocation planning purposes by analyzing the characteristics of installed equipment to compare them to various states’ methods for distinguishing between personal property and real property. The typical test for fixtures is the three-part test known as the Teaff method. Now, as we see, this task is equally important for tax planning within the relocation planning.
Below are my suggestions for recognizing and separating acquisition payments from relocation payments.
Acquisition Payments (Just Compensation) – Payments for the items listed below appear to be taxable as a capital gain but may be deferred by use of IRC 1033:
- Real property including; land, buildings, and other improvements including; driveways, utilities, well, septic system, landscaping, etc.
- Fixtures (non-movable, or permanent) The 3-part Teaff test may be needed to determine this fixture classification.
Relocation Payments – Payments or reimbursements made for the items below should be non-taxable to the displaced resident or business. The items listed are major categories within the Federal Uniform Relocation and Acquisition Act, which are eligible for reimbursement or payment. See my abbreviated version of the URA relocation benefits for a full but abbreviated list of eligible reimbursable relocation costs. (Another time, I’ll expand on these categories and their sub-categories in more detail)
Resident (homeowner or tenant)
- Moving and reinstallation of personal property, storage, and other moving related costs
- Replacement Housing Payment or Price Differential payment
- Amount by which the cost of the comparable replacement dwelling exceeds the acquisition amount of the displacement dwelling
- Increased interest on the replacement dwelling
- Expenses incidental to the purchase of the replacement dwelling
- Other remedies within the Housing of Last Resort
Business or Farm (property/business owner, landlord business, business tenant, non-profit, farm)
- Fixed Payment, also known as the In-Lieu Payment
- Moving Costs including 16 line items of eligible reimbursable costs
- Reestablishment Costs Including 7 line items of eligible reimbursable costs
- Related Eligible Expenses including 3 line items of eligible reimbursable costs
Separating eminent domain payments by the categories described above will help you plan your tax obligations. This work will also help you properly plan your relocation and help you receive proper and timely relocation payments, when prepared before you move.
The above discussion is my opinion as an eminent domain and relocation consultant. I recommend consulting a tax advisor prior to relying on this information for tax purposes. I would be pleased to discuss the methods for separating personal and real property in more detail with you as a displaced person, your tax advisor, legal counsel, or your displacing public agency.
If you are searching for guidance on the proper handling of these tax matters, please feel free to contact me. I’ll put you in touch with tax advisors who have worked in these situations and who I’ve discussed these matters with.
425-398-5708