The purpose of this post is to document my experience with a recent eminent domain taking. When I first heard it was going to happen, I searched Reddit for similar experiences, and didn’t find anything helpful, despite having a huge impact on our personal finances. So, I’m making this post in the hopes others find it when they need it. A quick note that eminent domain (also known as compulsory purchase or expropriation) is when the government takes private land for public use. My example was pretty textbook: the state wanted to build a road, and my land was in the way. So they essentially forced a sale.
Background: My wife and I live 6 acres of land in the Mid-Atlantic region. It’s rural, but on the other side of the road is suburban property. The state wanted to take this road, which is one lane in each direction, and make it two lanes one way, and lay down new pavement for two lanes in the opposite direction. And our driveway goes up to the road now, so a new road is being built for us (parallel to the new road) and the end part of the driveway is being removed to prevent us turning onto the highway directly. So the state needed about 2 acres of land, mostly flat pasture, which we were using for our horses boarded on the property.
The beginning: You may first hear about it from neighbors, but there will be mailings sent out to those affected, maybe over a year ahead of time. Keep track of project status and funding, and expect local meetings at nearby schools with the planners. You can talk to them and find out the plans. One thing to note is the plan is never set in stone. The state puts out a Request for Proposal, and contractors respond with proposals, and the chosen design wins the bid. So while the state man plan some minimum requirements, the winning proposal and design may be different.
When it gets real: You will receive official notice at some point that the state is going to try to buy your land. Now, if your state has a “quick take” provision, as ours does, heads up: the state can take your land with no negotiation at all. For us, this is allowed only if a reasonable amount of money, representing the value of the land, is placed in a Court fund, available to the homeowners without prejudice to future negotiations. Three months after the initial notice, our land was “condemned” and the state owned it, and we were defendants in a civil suit. No Deed transfer yet, but it was in effect gone. Along with this letter was an appraisal showing how they got the figure they got to.
The appraisal: The state will hire someone to appraise the land, and it’s no different than the appraisal you had done when you bought your house. They look at the land, the comps, and figure a range/average from there. Our county executive in charge of the project had built up a reputation of never having to ever go to court over eminent domain, so the comps were generous. And like other appraisals, the “highest and best use” was used, so this was a decent number, to be honest (1/3rd of what we paid for the entire property, but they weren’t taking any structures, just land).
The negotiation: Quick take or not, you’re going to want to negotiate with the state. It’s quite worth the time – since we have horses, and this land affected them, we compiled a loss per year due to the loss of this land (extra food costs, revenue lost from losing a boarder, e.g). We also compiled costs for restoring the remaining land to similar condition of the land being taken (grading hills to create flat pasture, new fencing, e.g). The state didn’t like our loss per year, but only because it wasn’t boiled to one simple number. So, I extrapolated the loss from our age until age 65, added restorative costs, and asked for twice what the state originally gave. They knocked it down to a round number, and we accepted.
The emails: I have never been involved in anything so… involved before. Even after all the estimates, documents, meetings with the lawyer and neighbors and agreeing on a price, it was a battle to get the money. You have to deal with courts, paperwork, and if you have a mortgage, your lender. Our lender is pretty chill, but they still wanted some money, as the property is losing value. After that’s all done, you need to get your check, and in our case, a second check from the state. All in all, this is one year of asking people “What can we do this week to move the process along?”. We’re still due some interest, and with COVID-19, I know it’s going to take many more months to get one simple check.
Taxes: I can answer questions about this, but read IRS Pub 544 for details. We got $X for the property, that’s a gain (or loss if your adjusted basis is higher than that). The $Y we negotiated to restore the property reduces the remaining property basis – so it’s not taxable. The $Z in interest (because it takes a year of sending emails) is taxed as ordinary income.
1) For $X, the gain is $X minus the basis, or what you paid for the property plus expenses in buying/upgrading/selling. Since ours was a subset/parcel of a larger lot, we got an appraisal for just that land (separate from the state’s) and a realtor to give us comps from the year we got the house. So say the realtor says it’s worth $50,000, we spent $5,000 in lawyer fees and appraisals, and we got $80,000 from the state, then taxes are $25,000×15%.
2) For $Y, the severance, say that was $40,000, and you paid $250,000 for your home. When you go to sell your home, say $300,000 in the future, your gain is $50,000 normally. Well now it’s going to be $90,000. Note the first $250,000 ($500,000 if filing joint) of gains of a primary residence are not taxed if you live in the house for at least 2 years. (edit: removed wrong tax info)
3) $Z is just normal income, easy to deal with
Timeline from getting the first official letter that eminent domain was happening:
3 months: The “taking” happens
6 months: Negotiated new price
9 months: Lender gets paid, we get paid first payment (from original)
15 months: We get paid the second payment (negotiated amount)
18+ months: Still haven’t gotten all the interest due
OK, I didn’t want this to be too long, so I’ll put this up, and feel free to comment with questions.