When is a government offer to take your property a real threat of condemnation, and when is it not?
You may need to bone up on the tax rules to find out the answer. If it’s indeed a real threat of condemnation, you get a nifty tax break.
Let’s assume you sell the property to the government and realize a profit. You’re liable for an immediate tax on that profit in the year you receive the proceeds. And this holds true even if you use the money to acquire similar property.
But here’s where the tax break comes in: The law allows you to delay settling with the IRS on some or all of the gain where the transaction passes muster under Code Section 1033 as an “involuntary conversion.”
To qualify for the deferral, you have to satisfy these requirements: The first stipulation is that your property must be seized, requisitioned or condemned or you must sell it under the “threat or imminence” of seizure, etc. The second is that you must buy — or acquire a controlling interest (80 percent) in a corporation that owns — property that is “similar or related in service or use” to the converted property within IRS replacement deadlines.
What happens, though, when a sale is under threat or imminence of condemnation? That’s treated the same as an actual condemnation proceeding.
Therefore, you may be able to take advantage of the deferral break, though there’s no actual condemnation. The key to satisfying the IRS is that the reason you make the sale is because of the threat and such.
The IRS has even approved a deferral in which a government official, authorized to take property for public use, states that the government has “decided to” acquire the property and it is reasonable to believe that condemnation proceedings would commence unless the owner sells voluntarily.
This pro-taxpayer approach also holds true where you become aware of the “decision” through a newspaper report or some other news medium, provided you obtain a confirmation of it from the official and you reasonably believe it to be so.
What if a condemnation is merely under “consideration”? Revenue Ruling 63-221 cautions that you don’t become eligible for deferral.
Publication 544, “Sales and Other Dispositions of Assets,” offers more on involuntary conversions, and is available at irs.gov.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting).
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...