personal residence involuntary conversion

Dear 1031x:   My client has lived in her home for less than 2 years.  Now it is being taken under eminent domain.  What will be the tax consequences? 

 

Dear K:  Two IRC code section are involved here: 121 (sale of principal residence) and 1033 (involuntary conversion).   Under 121, in the event of an involuntary conversion (eminent domain) prior to 2 years of ownership (your case) then part of the gain is excluded from taxation.  The calculation of excluded gain is: $gain x number of months owned/24.  In your case $29,000 x number of months owned/24= excluded gain.   The rest of the gain would be taxed as long term capital gains.  On the other hand I believe that you could exclude the entire gain from taxation under IRC section 1033 (involuntary conversion)  by reinvesting in a property similar in use and of equal or greater value within two years.    Therefore you have two option here.  Partial exclusion under 121 is probably your best option as the tax will be quite small under the partial exclusion rule.  Please check this out with a tax professional of your choosing as well.  More brains are better than less.  Also feel free to share my analysis with this tax professional.  Yours truly,

Steve Hickox
Attorney / President

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