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It sounds as though this property was condemned. Condemnation occurs when a private property is legally taken by a government body for public use without the owner’s consent. Basically, the settlement that was received was a condemnation award. The company can elect to postpone reporting the gain on this condemned property if they are going to replace the restaurant within two years. If they make the election to postpone reporting the gain, then they decide later that they can’t find a property they like or just don’t want to replace the property anymore, they will have to file an amended tax return for the year of the condemnation and report the gain. Here is a link to the IRS publication that discusses disposition of property. Look at “condemnation”. http://www.irs.gov/publications/p544/ch01.html#en_US_publink100072304
If you are not going to postpone the gain, you will report the settlement as a sale of the property. You will pay capital gains on the settlement received less the adjusted basis. You can also add the costs of fighting the condemnation or the costs of coming to a settlement to the costs of the property as well.
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