"Section 1033 of the federal tax code allows sellers to avoid gain on property sold 'under threat or imminence' of condemnation, as long as they re-invest the proceeds no more than two years after the year in which the sale is made. It's not necessary for the city to actually institute condemnation proceedings; just a credible threat triggers the tax break. The Tax Court has stated the rules so:This is interesting.
A “threat of condemnation” exists if (1) the body threatening condemnation possesses the power of eminent domain, (2) the property owner is told by an official of the threatening body that condemnation will be sought unless the owner negotiates a sale or exchange of the property, and (3) the information conveyed to the owner gives the owner reasonable grounds to believe that the threat was authorized and likely to be carried out unless a sale or exchange is arranged.…
A whiff of a threat of condemnation can make a sale tax-free to a buyer who is willing to reinvest in other property somewhere. A seller and buyer can more or less arrange a condemnation 'threat' with the city to qualify a property for Section 1033. While I'm not privy to the Principal and Wells-Fargo land purchases cited by the Register, I would be surprised if Section 1033 wasn't an important part of the mix.
In theory, the buyers can arrange for similar tax results using a Section 1031 'like-kind exchange.' These are more difficult to pull off, though, because there is only a six-month window to reinvest proceeds, and a Section 1031 deal has to meet a long list of fussy technical requirements.
I believe Kelo is still bad law and bad policy (I include here my standard disclaimer that I speak for myself, not the firm). It still amounts to a way for the well-connected to get a better deal than the little guy in their property purchases. But efforts to overturn Kelo in the legislature may run into resistance from a surprising quarter: potential sellers of property who could use a whiff of condemnation to make their property sales tax-free."
Monday, January 30, 2006
Tax Benefits?
Joe Kristan:
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