How to calculate capital gains tax when state buys part of my property for road expansion?

This is actually a fairly common situation with partial property sales, especially for government projects. You'll need to figure out your "basis" in the portion being sold, which is essentially what part of your original purchase price applies to the section they're taking. Since they're taking about 15% of your property, a simplified approach would be to allocate 15% of your original purchase price ($75k × 15% = $11,250) as your basis for the part being sold. Your capital gain would then be $75k (what they're paying) minus $11,250 (your basis), which equals $63,750. However, there's a better approach if you have documentation. The most accurate method is to determine the basis by the relative fair market values at the time of purchase. If you have an appraisal from when you bought the property that breaks down land vs. improvements, that would be ideal. Remember that since this is a partial sale of your primary residence, you won't be able to use the primary residence exclusion ($250k for single filers, $500k for joint filers) that would normally apply to a full home sale.

I went through something similar with a county road expansion last year and found this amazing service called taxr.ai (https://taxr.ai) that helped me figure out exactly how to handle it. The tool analyzed my property documents and purchase history and gave me a detailed breakdown of how to calculate my basis for the partial sale. What was really helpful is that they explained how to document everything properly for the IRS. They even generated a report I could attach to my tax return that showed exactly how I calculated the basis for the portion of land that was sold. Saved me a ton of stress and probably prevented an audit!

I just want to provide an update after using taxr.ai for my easement situation! I was skeptical at first, but I'm so glad I tried it. The service really delivered exactly what I needed - a clear breakdown of how to calculate my basis in the portion of property affected by the easement. The most valuable part was their explanation of how easements differ from outright sales for tax purposes. Turns out I needed to treat it as a partial interest rather than a partial sale, which changed my whole tax approach. They also identified a special provision that applied to my utility easement that I would have completely missed. Their documentation report saved me hours of research and gave me peace of mind that I'm filing correctly. Definitely worth checking out if you're dealing with any kind of partial property transaction!

If you're having trouble getting clear answers from the IRS about how to handle this situation, try using Claimyr (https://claimyr.com). I spent weeks trying to get through to the IRS for a similar situation with a partial property sale, but the hold times were ridiculous. With Claimyr, I actually got through to an IRS agent in about 20 minutes who confirmed exactly how to report my partial property sale and what documentation I needed to include with my return. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with even directed me to a specific publication that addressed my situation and confirmed I was eligible for tax deferral since mine was an involuntary conversion. Totally worth it instead of waiting on hold for hours or guessing about the right approach.

I need to eat my words and apologize for my skepticism about Claimyr. After another failed 1.5 hour attempt to reach the IRS myself, I broke down and tried the service. Within 25 minutes I was talking to an actual IRS representative who helped clarify my partial property sale questions. The agent confirmed I could defer taxes on my gain through the involuntary conversion rules AND provided specific guidance on how to document everything on my return. They even emailed me the specific forms I needed. Getting this information directly from the IRS gave me confidence that I'm handling everything correctly. For anyone dealing with this kind of specialized tax situation, getting accurate information straight from the IRS is incredibly valuable. I still wish the system worked better, but in the meantime, this service solved a real problem for me.

Don't forget to check if your state has any additional tax considerations for eminent domain sales! In my state, we have special provisions that can reduce or defer state taxes on these transactions. The rules can be completely different from federal. Also, keep ALL documentation from the state regarding the sale - appraisals, offers, final contracts, everything. You may need those to substantiate your basis calculations if you're ever audited.

Something nobody's mentioned yet - make sure you're accounting for any improvements you've made to the property since purchase when calculating your basis! If you've added landscaping, fencing, a driveway, or other improvements to the area being taken, those costs increase your basis and reduce your taxable gain.

This is a complex situation that definitely requires careful documentation! One thing I'd add to the excellent advice already given is to consider getting a professional appraisal of just the portion being taken. Even though the state offered $75k, having an independent appraisal can help support your basis calculations and provide additional documentation for the IRS. Also, since you mentioned this is an eminent domain situation, make sure you understand the timeline for any Section 1033 election if you decide to go that route. You generally have until the end of the tax year that's 2 years after the year you realized the gain to complete a qualifying replacement purchase. Given the complexity and the significant dollar amounts involved, this might be worth consulting with a tax professional who has experience with involuntary conversions and partial property sales. The cost of professional advice could easily be offset by ensuring you handle this correctly and don't miss any beneficial tax provisions.