The settlement is the middle of the process, not the end

Agreeing on an amount is one milestone. After that, funds are paid, title and possession transfer, tax reporting begins, and, if you plan to use Section 1033, a replacement deadline is already running or about to.

The details and timing vary by state and by your situation. This page shows the usual path so you know which questions to ask.

This page is educational and not advice for your situation.

What typically follows a settlement

Not every item applies to every owner, and the order can differ. These are the areas worth checking.

• Payoff of loans and liensMortgages and other liens are often paid from the proceeds before you receive the balance.
• Transfer of title and possessionWhen you must hand over the property varies by state and by the terms of the order or agreement.
• Tax reportingYou may receive forms reporting the proceeds. Your tax advisor can explain how they apply.
• The replacement clockIf you plan to use Section 1033, the replacement period is strict and can start before the check arrives.
• Relocation and other paymentsSome owners and tenants may be entitled to separate payments. Rules vary.
• Where the money sitsWhere proceeds are held while you decide can matter for your tax and planning options.

A sensible order of operations

Before the funds are used for anything, a short sequence tends to prevent expensive surprises.

1. Confirm the numbersGet a clear breakdown of what was paid and what each amount covers.
2. Bring your advisors togetherYour tax advisor, attorney, and financial advisor should see the same facts at the same time.
3. Decide on a plan firstChoose how the funds will be used before moving or spending them.

A general illustration. Your own facts and your state’s rules decide what applies.

Know exactly what you were paid for

Question to ask
What does this payment cover: land, improvements, damages, relocation, or interest?

A settlement statement can combine items that are treated differently for tax purposes. A clear breakdown makes it easier for your tax advisor to work out your basis, any gain, and what may be eligible for deferral.

If the paperwork does not itemize the payment, ask the condemning authority or your attorney for a breakdown.

Keep the proceeds separate until there is a plan

Question to ask
Where should the funds be held while I decide, and who can see the account?

Gain is generally recognized to the extent proceeds are not reinvested. Mixing the money with day-to-day funds, or spending part of it, can make it harder to show what was and was not reinvested.

Ask your tax advisor and financial advisor how to hold the funds before you move them.

Put the replacement dates on a calendar

Question to ask
When does my replacement period begin, and when does it end?

Under Section 1033, the replacement period generally ends two years after the close of the first tax year in which any gain is realized. For condemned business or investment real property, it is generally three years. It can also begin as early as the threat of condemnation.

Unlike a 1031 exchange, there is generally no 45-day identification rule, which makes it easy to let time slip.

Have your tax advisor confirm your dates in writing.

See how Section 1033 fits in

Section 1033 explained in two minutes, before you make any decisions with your proceeds.

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Questions to bring to your first conversation

Print this list or save it. Your tax advisor, attorney, and financial advisor can help answer them.

• What does this payment cover, and how is it broken down?
• When does my replacement period begin, and when does it end?
• Where should the proceeds be held while I decide?
• How do my basis and any gain affect how much I may want to reinvest?
• Who on my team needs to see the settlement paperwork, and when?

Common questions

How soon after the settlement do I need to decide what to do?

It depends on your facts. If you plan to use Section 1033, the replacement period is the key deadline, and it can begin before the settlement. It is worth confirming your dates with your tax advisor early.

Do I owe tax on a condemnation settlement?

Proceeds above your adjusted basis are generally a gain, and Section 1033 may allow you to defer it if you reinvest in qualifying replacement property. Your tax advisor can tell you how this applies to you.

What if my replacement property costs less than the proceeds?

Gain is generally recognized to the extent the proceeds are not reinvested. Your tax advisor can walk through the numbers for your situation.

Who should be on my team?

Many owners work with a tax advisor, an eminent domain or real estate attorney, and a financial advisor, and sometimes an appraiser. Having them look at the same facts at the same time helps avoid gaps.

Talk it through before the money moves

If you have received, or expect to receive, condemnation proceeds, a 15-minute conversation can help you understand the questions to ask, alongside your tax advisor and attorney.

Louis Herford

Exclusive Financial Resources

LHerford@Exclusive1031.com

(704) 451-8292

Book a 15-minute consultation

Wondering if Section 1033 applies to you?

If you sold, or may sell, to a government authority before condemnation, see how Section 1033 may still apply.

Read the guide →

Keep reading

• 5 financial mistakes property owners make during eminent domainRead the guide →
• Understanding severance damagesRead the guide →
• How Section 1033 tax deferral worksRead the guide →

Important disclosures

This material is general in nature and is not tax or legal advice. Section 1033 rules are complex, and eligibility and deadlines depend on individual circumstances. Consult a qualified tax advisor or attorney regarding your situation.

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