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Stephanie B.
Stephanie B., Enrolled Agent
Category: Tax
Satisfied Customers: 556
Experience:  MTax, EA, QuickBooks Proadvisor. Over 15 years accounting and tax experience specializing in individual and small business.
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I work for a company that owns restaurants. At 12/31/2011,

Customer Question

I work for a company that owns restaurants. At 12/31/2011, we abandoned one of our restaurants, as a tollroad is being constructed through it. We should see settlement funds of approximately $750K. The building was written off due to abandonment at 12/31/2011. At that time the adjusted tax basis was $194,750 (original cost basis of $358,633). Since the funds are more than the adjusted basis the entire amount of funds received are taxable, correct? I'm not sure I am asking this next question correctly, but of the amount that was written off what would be ordinary income and/or cap. gains?
Submitted: 4 years ago.
Category: Tax
Expert:  Stephanie B. replied 4 years ago.

Stephanie B. :

Thank you for using Just Answer.

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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If you need more clarification, please let me know. If I am not available at the time, I will be.

I appreciate the opportunity to assist you and I look forward to your response.

Stephanie