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Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2664
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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How can I avoid/reduce capital gains tax on a eminent domain

Customer Question

How can I avoid/reduce capital gains tax on a eminent domain circumstance. Can I choose to place a significant amount of money in a retirement account to help counter the impact of the cgt? I am 60 years old, still working with about a year's salary in savings. I received $100k for the land subject to eminent domain.
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: I am not too keen on a real estate purchase...can't get much with a $25k down payment.
JA: OK. Got it. I'm sending you to a secure page on JustAnswer so you can place the $5 fully-refundable deposit now. While you're filling out that form, I'll tell the Accountant about your situation and then connect you two.
Submitted: 4 months ago.
Category: Tax
Expert:  Barbara replied 4 months ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Involuntary conversions are also called involuntary exchanges. The taxable "gain" from a condemnation of property is the amount realized (in your case, $100,000) MINUS the adjusted basis of the property, i.e., generally what you paid for the property. In other words, you will not pay capital gains tax on the amount you receive ($100,000).

Election to postpone gain

Report your election to postpone reporting your gain, along with all necessary details, on a statement attached to your return for the tax year in which you realize the gain.

To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. This is the replacement period.

The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized.

The 1033 election requires a taxpayer (either an individual or a business) to make a timely election and a timely replacement to defer gain on property following an involuntary conversion.

If this is your home, if you meet the IRS requirements of owning and using the property as your main home for a period totaling 2 years out of the past 5, you may qualify to exclude up to $250,000 of the gain from your income or $500,000 if you file a joint return with your spouse.

Please let me know if I can assist you further.

Thank you and best regards,


Customer: replied 4 months ago.
Hi Barbara,
The last paragraph you wrote, "if this is your home...", well it is my home and I have lived in it for 2 of the past five years and am are there other qualifiers to exclude up to $250k--that would cover my $100k gain, right?
Customer: replied 4 months ago.
At the end of the first paragraph you write that I will not pay cgt on the $100k.Great!! The next paragraph talks about an election (?) and postponing reporting a gain--which I did not think I had after reading the previous paragraph, so not sure why you included this. Not sure if you need more information or if you did not understand my question. Do I need to purchase property? Is the $100k not a gain at all? Your response leaves me unsure what to believe.
Expert:  Barbara replied 4 months ago.

I apologize if I was not clear in my response.

I gave you all of the information regarding paying capital gains tax due to eminent domain. I wrote that you do not figure your capital gains tax on the amount you receive from the disposition. You pay capital gains tax on the DIFFERENCE between what you paid when you purchased the property and the amount you receive. For example, if you purchased the property for $50,000 and received $100,000 due to eminent domain, you would pay capital gains tax on $50,000 (the difference) NOT the full amount that you receive.


If you lived and owned the property for 2 of the last 5 years immediately preceding the disposition/sale, you can exclude up to $250,000 of the gain. If your gain is $100,000, you will have no capital gains tax to PAY, but you do have to REPORT the disposition/sale on your tax return.

Make sense?

Best regards,


Customer: replied 4 months ago.
Well, Barbara, if what your have shared is true...that would be very good news. I will check this out with my tax professional who has practiced here in California for 40 years. Not sure why your assessment and his can be so different. He recommended that I purchase real estate (or a business) or be prepared to pay about $25k in taxes.I hope you are correct since that would be a far better scenario. I'll get back to you.
Expert:  Barbara replied 4 months ago.

Perfect. Let me know.

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