How is eminent domain payment of $2800 taxed for bridge construction project?

So the county is taking a small chunk of my backyard for this bridge expansion project. They sent me paperwork saying they're using eminent domain and offering $2800 as compensation. I signed all the documents already since it wasn't worth fighting over that little strip of land near the creek. But now I'm wondering how this impacts my taxes? Will I need to report this as income? Is it considered a capital gain? Do I need to calculate some kind of basis for just that piece of property? I've tried googling but keep finding contradictory information mostly about much larger eminent domain situations. Has anyone dealt with something similar? The county paperwork didn't mention anything about tax implications.

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19 comments

StarStrider

•8M

The taxation of eminent domain payments depends on how the payment compares to your "basis" in the property taken. Since this is just a portion of your property, you'll need to determine what percentage of your overall property was taken. For example, if the government took 5% of your total property area, you would allocate 5% of your original purchase price (plus improvements) as the basis for the taken portion. If the $2800 payment exceeds this allocated basis, the difference is a capital gain. If it's less, you have a capital loss. The good news is that under IRC Section 1033, you can defer recognizing any gain if you reinvest the proceeds in similar property within a specific timeframe (typically 2-3 years). This is called "involuntary conversion" treatment. For a relatively small amount like $2800, the tax impact might be minimal, but you should still report it correctly on your tax return.

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StarStrider

•8M

For basis calculation, you'll want to start with what you paid for the entire property, plus any improvements that added value (renovations, additions, etc.) - routine maintenance doesn't count. The most accurate way to determine the percentage taken would be to compare the square footage of the taken portion to your total property. If you have your property survey or tax records, they should show the total square footage. Then measure the taken portion from the eminent domain paperwork. For example, if your property is 10,000 sq ft and they took 500 sq ft, that's 5% of your property.

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Luca Marino

•8M

I went through something similar last year when the city expanded a road near my property. I was totally confused about the tax implications until I found this service called taxr.ai (https://taxr.ai) that helped me understand exactly how to report it. I uploaded the eminent domain paperwork and my property records, and they analyzed it and explained that in my case, the payment was actually less than my basis in that portion of land, so I had a small capital loss. They also showed me how to document everything properly for my tax return. Saved me hours of research and worry about doing it wrong!

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Luca Marino

•8M

I provided them with the eminent domain documents which had the square footage of the taken portion, and also uploaded my property tax records which showed my total lot size. They used those to calculate the percentage. The service actually reviews your specific documents and provides personalized analysis. They have tax professionals who examine your situation and give you tailored advice, not just generic information. I was skeptical at first too, but they were really thorough and explained everything in plain language.

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Mateo Perez

•8M

Just wanted to update that I ended up trying taxr.ai after all. Really glad I did! They helped me figure out that my $3500 eminent domain payment (county widening our road) was actually LESS than my basis in that portion of the property, so I had a small capital loss I could claim. Without their help, I probably would have just reported it all as taxable income and overpaid. They even provided documentation I could attach to my return explaining the calculation. Definitely worth it for the peace of mind!

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Aisha Rahman

•8M

If you're planning to call the IRS to ask about this, good luck getting through! After my eminent domain situation (county took part of my front yard for a sidewalk), I spent DAYS trying to reach someone at the IRS to confirm how to report it. Finally found Claimyr (https://claimyr.com) which got me through to an actual IRS agent in less than 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that I needed to file Form 8949 to report the transaction, and explained exactly how to allocate my basis. Turns out I was doing it wrong and would have potentially triggered an audit flag. Saved me so much time and stress compared to the endless hold music and disconnects I was dealing with before.

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Aisha Rahman

•8M

They use a technology that navigates the IRS phone system and holds your place in line. When they reach a human agent, you get a call connecting you directly. It's not "skipping" the line - you're still in the same queue, but you don't have to personally wait on hold. They actually explain the whole process on their site. It's not a scam - they just automate the hold process so you don't have to keep your phone tied up for hours. The IRS is severely understaffed and the average wait time is over 2 hours if you can get through at all. This just makes that process manageable.

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Ethan Brown

•8M

Ok I need to publicly eat my words here. After posting that skeptical comment, I was still struggling with my own eminent domain issue (utility easement payment) and getting nowhere with the IRS phone line. Out of desperation I tried Claimyr and holy crap it actually worked. Got connected to an IRS agent in about 15 minutes. The agent confirmed that I needed to use the "involuntary conversion" rules and helped me understand how Form 8949 needed to be filled out. They even sent me to a specialist who explained the reinvestment options if I wanted to defer the gain. Would have NEVER gotten this info otherwise. Sometimes being wrong feels pretty good!

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StarStrider

•8M

The tax treatment depends on the legal nature of the transaction, not the specific paperwork title. If the government is using its eminent domain power to take your property (even if they call it something else), the tax rules for involuntary conversions would still apply. What matters is: 1) Is it an involuntary taking by a government entity? 2) Are you receiving compensation for it? If yes to both, then the same tax rules we've been discussing would apply regardless of what they call the paperwork. Make sure you get documentation showing the exact portion of property being taken (measurements/square footage) and keep all correspondence for your tax records.

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Andre Rousseau

•8M

Bad idea. Most government agencies report payments to the IRS. The county will likely issue a 1099 for the payment, so the IRS will know about it. If you don't report it, you'll probably get a letter asking why the income reported to them doesn't match what you reported on your return. Even if they didn't issue a 1099, intentionally failing to report income is tax fraud. Not worth the risk over a small amount that might not even result in much tax anyway if you calculate the basis correctly.

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Sean Fitzgerald

•4M

I'm dealing with a similar situation right now - the state is taking a strip of my front yard for highway widening and offered me $3,200. After reading through all these comments, I'm realizing this is more complicated than I initially thought. One thing I haven't seen mentioned yet is whether you should get an independent appraisal of the taken property. The government's offer might not reflect the actual fair market value, which could affect your basis calculation and potential gain/loss. In my case, I'm wondering if $3,200 is actually fair compensation or if they're lowballing me. Also, has anyone dealt with the situation where improvements you made (like landscaping, fencing, etc.) are affected by the taking? I had put in some expensive landscaping in that front area a few years ago, and I'm not sure if that factors into the basis calculation or if I should be asking for additional compensation for those improvements. The involuntary conversion rules mentioned earlier sound helpful, but I'm curious if there are any specific deadlines I need to be aware of for making decisions about reinvestment or filing the proper forms.

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Benjamin Johnson

•4M

Great questions! For the independent appraisal, you absolutely have the right to challenge their offer. Many people don't realize that the initial government offer is often negotiable. If you think $3,200 is low, getting your own appraisal could help you negotiate a higher amount - and that higher amount would then be used for your tax calculations too. Regarding improvements like landscaping, those should definitely be included in your basis calculation if they added value to the property. Keep receipts for the landscaping work you did in that area. The tricky part is determining what portion of those improvements is allocable to the specific strip being taken. For the involuntary conversion deadlines, you generally have until the end of the second tax year following the year you receive the payment to reinvest in qualifying replacement property. But there can be exceptions, so definitely confirm the specific timeline that applies to your situation. Don't wait until the last minute to make these decisions!

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