Replacement property is defined by IRS Publication 544 as follows:
“To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. You do not have to use the actual funds from the condemnation award to acquire the replacement property. Property you acquire by gift or inheritance does not qualify as replacement property.”
“Like-kind” and “Similar or related”
“Your replacement property must be similar or related in service or use to the property it replaces. If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use.” IRS Publication 544
When we have spoken directly with representatives of the Internal Revenue Service, there is agreement that the “like-kind” definition be used when the property taken was held for productive use in trade, business or for investment. After all, where does one find replacement property that is “similar or related in service” for a right-of-way easement, stripped from the middle of raw land, that is 150 feet by 2 miles long? The answer given was to refer to the “like-kind” section of IRS Publication 544.
“In a like-kind exchange, both the real property you give up and the real property you receive must be held by you for investment or for productive use in your trade or business. Buildings, land, and rental property are examples of property that may qualify.
The rules for like-kind exchanges do not apply to exchanges of the following property.
The IRS takes a broad-scope approach to the definition of “like-kind.” Regulations clearly state that “all real property is like-kind to all real property.” Real property in the United States can be exchanged for real property in the United States. In addition to the 50 states are the U.S. Virgin Islands, Guam and the Northern Mariana Islands, if your property is subject to the Coordinated Territory rules of each particular territory. So, if your real property (your name or entity is on the fee title) has been taken by threat of eminent domain or involuntarily converted by condemnation, you can look for other real property as replacement property.
“Qualifying property is that which is ‘similar or related in service or use.’ This test examines the relationship of the taxpayer to the investment. If real property (but not inventory) held for productive use in a trade or business or for investment is condemned, the more lenient ‘like kind’ test under Sec. 1031 is applied.”
– Keith Kebodeaux, J.D., LL.M.,
MSA, Condemnation of
Pipeline Easements: The
Landowner’s Perspective
February 28, 2014
We are not your tax advisor, CPA or enrolled agent. Please seek out competent counsel regarding tax issues which occurred from condemnation of your property.
For a PDF of IRS Publication 544, click here.
