Every eminent domain attorney knows the award is taxed. Fewer have a routine for when the tax question enters the file, and the answer that protects the client is earlier than most practices are built for: before the deposit is negotiated, not after the settlement is signed. Four questions decide whether that happens. When do you ask whether the client has a CPA? Who do you send them to? What information does that person need? And why does the basis of the property being taken matter before a dollar of the deposit is received? Here is each, with the reason behind it.
The short version. Ask about the client’s tax advisor at the first meeting, not the last. Send them to someone who works condemnations, not only returns. Get the property’s basis calculated before the deposit is negotiated. Because a deposit above basis is gain, and gain starts the Section 1033 clock.
When do you ask whether the client has a CPA?
At the first meeting, alongside the questions about the property and the notice. Not because the attorney will do the tax work, but because the tax work has a deadline that is set by the condemnation, not by the tax calendar. The award, and often the deposit before it, is a taxable event in the year it is received. A client who first hears the words “tax planning” after the settlement has lost the part of the planning that mattered most.
The question itself is short: who prepares your returns, and have you talked with them about this taking? Many owners have a preparer who sees them once a year and has never handled a condemnation. That is not a criticism of the preparer; a condemnation is a specialty, and the preparer will want the specialist too.
Who do you send them to?
Someone who has worked the tax side of a taking before, and who will work with the client’s existing CPA rather than around them. The specialist’s job is narrow and time-bound: calculate the adjusted basis of the property being taken, separate the parts of the award that will be taxed differently, identify what Section 1033 can defer and what it cannot, and give the attorney the tax picture before the deposit and the settlement terms are fixed. The CPA files the return. The attorney wins the award. The specialist makes sure the two meet in time.
What to avoid is the referral that comes with a fee arrangement in either direction, or a specialist who arrives with a product to sell. The referral protects the client only if it is clean. Ours is: we are not attorneys, we do not negotiate awards, we accept no referral compensation and offer none, and if the numbers say the owner does not need us, we say so.
What information do they need?
Less than the attorney might expect, and mostly things the client already has: the closing statement from when the property was bought, the depreciation schedules if it has been depreciated, the cost of improvements, any prior partial sales or takings on the parcel, the survey or sketch showing what is being taken and what remains, the appraisal or the condemnor’s offer, and the timeline of the proceeding so far. From those, the basis can be calculated and the award can be read: how much is for the land, how much for buildings and equipment, how much is severance to the remainder, and how much may be interest. Each of those is taxed differently, and each has a different answer under Section 1033.
Why does the basis matter before the deposit?
Because the deposit can start the clock. The Section 1033 replacement period runs from the end of the first taxable year in which any part of the gain is realized. When the condemning authority deposits its estimated compensation and the owner receives an amount above the property’s adjusted basis, gain is realized in that year, and the replacement period is measured from the end of it, not from the final award. An owner who takes a deposit without knowing the basis may have started a two- or three-year clock without knowing it, and may have taken ordinary income on equipment that no election can defer.
With the basis in hand before the deposit is negotiated, the attorney and the tax team can see what the deposit will do: whether it exceeds basis, what part of it is recapture that cannot be deferred, and how much cash should be set aside. That is the moment when planning is still possible. After the deposit, the planning is about what is left.
Where a tax specialist fits
We are not the owner’s attorney and we do not negotiate awards. We calculate the basis and the recapture exposure before the deposit, sequence the Section 1033 election with the owner’s CPA, and give the attorney the tax picture before the deposit and the terms are final. If the owner does not need us, we say so. The first call is free.
Frequently asked questions
Does a condemnation deposit count as receiving the award for tax purposes? To the extent the owner receives it and it exceeds the property’s adjusted basis, gain is realized in that year, and the Section 1033 replacement period runs from the end of that year.
Is it the eminent domain attorney’s job to calculate the client’s tax? No. It is the job of the owner’s tax professionals. The attorney’s part is to ask the question early and to make sure the basis and the tax picture are in hand before the deposit is negotiated.
What does the tax specialist need from the attorney? The sketch of what is taken and what remains, the offer or appraisal, and the proceeding’s timeline. The rest comes from the owner’s own records.
Have a client between the notice and the deposit? A free thirty-minute call with Steve Medendorp puts the basis and the tax picture in your hands before the deposit is set.
