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We are selling a portion of our land to the State for a road

expansion project. The portion of...
We are selling a portion of our land to the State for a road expansion project. The portion of land (right of way) we are selling is part of the land where our primary residence is. Part of the settlement is based on land value and a larger part is for damages. How do we figure taxes on this and plan for next year? Are the damages taxable?
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Answered in 11 minutes by:
3/28/2011
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,150
Experience: Taxes, Immigration, Labor Relations
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LEV :

Hi and welcome to Just Answer!

LEV :

Compensation for damages made for your property is not taxable, but reduce the basis of your property. After the basis is reduced to zero - additional compensation will be taxable as capital gain.

Customer:

Ok, so I am only taxed on the portion that is based on value of land? If so, how much?

LEV :

A portion of our land that is sold - it treated as a sale transaction. You need to prorate your basis specifically to that part and calculate the capital gain on the schedule D.

Customer:

How do I figure basis when the land was given to us?

LEV :

If that is a long term capital gain (for the property owned more than a year) - max long term capital gain rate is 15%. Depending on your total income - for the part of the gain that otherwise would be taxable at 15% or below - the long term capital gain rate is zero percent in 2011.

LEV :

"the land was given to us" - please be clear - was that a gift? inheritance? other?

Customer:

"Sold" for $1 to us by parents about 15 years ago

LEV :

That is treated as a gift - your basis is teh same as your parents had at that time. Plus improvement if any.

Customer:

So the cost of the house would be considered improvement?

LEV :

Yes - but if the part of the land you are selling has no improvements - that should be considered.

Customer:

The only improvement would be the portion of the driveway I guess. We are selling 1/2 an acre with no other improvements to that part except the driveway.

LEV :

So - the basis for the sold property would be = the basis of the of the portion of the land plus the basis of the driveway.

Customer:

I have no idea what the basis would be for my parents at the time of the "gift". This land has been in my family for many many years. I can figure the basis of the driveway because I know how much we paid but clueless on land basis.

LEV :

Unfortunately - that is what you need to find out to reduce your taxable income. The basis is generally a purchase price if the property was purchased. If the property was ever inherited – there would be stepped up basis (FMV at the time the owner died). You may try to find purchase records n your county. Any real estate agent in your area may help you.

Customer:

Ugh. Ok, thanks.

Lev
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Satisfied Customers: 30,150
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