Understanding the Out of State Owner Award Process

If you live in one state but own property in another, you could face a unique challenge if that property gets taken by the government. This is called condemnation, which means the government takes private property for public use, like building a road or a school. When this happens, the owner receives a payment, known as an out of state owner award. But what comes next? Especially if you’re not living in the state where the property was located?

This guide takes you through each step after an out of state owner award, with clear explanations, practical examples, and simple tips to help you avoid common mistakes. You’ll learn how to handle taxes, what documents to keep, and when to ask for help, so you can keep more of your money and stay out of trouble with the tax authorities.

What Is an Out of State Owner Award?

When the government takes your property, they have to pay you what the property is worth at fair market value. This payment is called a condemnation award. If you live in a different state from the property, it’s called an out of state owner award. It’s meant to compensate you for your loss, but the process is rarely simple. The money you receive is often treated as income, and both the state where the property was and your home state may want to tax that payment.

Why does your home address matter? Because state tax laws are different. Even if you haven’t set foot in the state where your property is, you might owe taxes there because the property was located there. At the same time, your home state may also want to tax the income you just received. If you don’t handle this properly, you could pay too much, get hit with penalties, or miss out on deductions you deserve.

For example, let’s say you live in Pennsylvania but own a rental house in Illinois. Illinois condemns the house to widen a highway, and you get an award check. Even though you’re a Pennsylvania resident, Illinois will want you to file a nonresident tax return to report that income. Pennsylvania will also want to know about the money you received. Getting this right means understanding both states’ rules and how they interact.

Multistate Tax Filing: What Nonresidents Need to Know

If you’re a nonresident who just got a condemnation award, here’s what you need to know about taxes. The source state (where your property was) generally expects you to file a nonresident return for the year you got the money. Your home state (where you live) also wants to know about the payment, and it may offer a tax credit for any taxes you paid elsewhere. But not every state works the same way, and the rules can get pretty detailed.

Let’s walk through a practical example. Suppose you live in Florida but own a small commercial property in New York. New York uses eminent domain to take the property for a new train station. You get a condemnation award. Here’s what happens next:

  1. File a New York nonresident return. Even though you’re not a New York resident, you made money from property there, so New York wants its share.
  2. Report the award on your Florida return. Florida actually doesn’t have a state income tax, but if you lived in a state that does, you’d need to report the income there too.
  3. Claim credits if possible. Some states let you claim a credit for taxes paid to other states, which helps reduce double taxation. But you need to check your state’s rules.
  4. Keep detailed records. Save every document related to the award, including the settlement agreement, legal bills, and correspondence with the government or tax agencies.

The process is called nonresident state filing, and it trips up many people. Even if the numbers seem small, missing a filing or reporting incorrectly can lead to penalties or extra taxes later on.

Common Pitfalls in Multistate Condemnation Cases

Filing taxes in more than one state can feel confusing, especially if you’re already dealing with the stress of losing property. Here are the most frequent mistakes that out of state owners make, and how you can avoid them:

  1. Missing the source state’s tax rules. Many owners assume they don’t owe taxes in the state where the property was, especially if they never lived there. But the state considers the award as income earned within its borders.
  2. Double-taxation. If you report the income in both states but don’t claim a credit or deduction where allowed, you could pay tax twice on the same money. For instance, if your home state doesn’t offer a credit, you’ll need to plan for higher taxes.
  3. Overlooking deductions and expenses. Legal fees, appraisal costs, and some transaction expenses may be deductible. Missing these means you might pay more than you should. Keep all receipts and ask a tax expert to review them.
  4. Not tracking deadlines or forms. Each state has its own tax forms and filing deadlines. Some states require extra documentation, like a copy of the condemnation award letter or settlement agreement. Missing a deadline can mean penalties or interest charges.
  5. Failing to adjust for partial year residency or property sales. If you moved during the year or sold other properties, you may have extra steps. For example, if you moved from Ohio to California mid-year, both states may expect you to file returns for the period you lived there or owned property there.

Avoiding these mistakes comes down to staying organized and asking questions. If you’re not sure about something, reach out to a professional who knows multistate property tax issues.

How State Taxes Work: Source State vs. Home State

When you get an out of state owner award, you’ll hear about two states: the source state and your home state. Here’s what each means:

The source state is where your property was located. This state usually treats the condemnation payment as taxable income, so you have to file a nonresident return there. Your home state is where you actually live, and it may also tax the payment, depending on its rules.

Let’s break down how this plays out with an example. Imagine you live in Georgia, but you inherit farmland in Iowa. Years later, Iowa takes some of that land for a new park and pays you an award. Iowa considers you a nonresident, but still wants you to pay tax on the money you got from the property. Georgia, your home, may want to tax the award too. Some states, like Georgia, offer credits for taxes paid to other states, which helps prevent double taxation. But not all states do, so you need to check carefully.

It’s not just about state income tax either. Some states have local taxes, special assessments, or reporting requirements that can affect your total bill. If you don’t plan ahead, you might be surprised by how much you owe, or how complicated the paperwork becomes. Keeping this in mind helps you avoid costly surprises.

Key Documents and Steps for Multistate Filing

Getting your paperwork together is a vital part of handling an out of state owner award. Here’s what you’ll need to collect and keep:

  1. Condemnation award letter. This is your official notice of how much you’ll receive for your property.
  2. Settlement statement or closing documents. These show how much was paid out, any deductions for expenses, and the net amount you received.
  3. Receipts for legal fees, appraisals, or other related expenses. These could be deductible and lower your taxable income.
  4. State-specific tax forms. Both your source state and home state will have different forms and instructions for reporting the award.
  5. Correspondence with tax agencies. If you communicate with state tax departments about your case, keep copies of every letter or email.
  6. Bank statements or deposit records. These help prove when and how you received the money.

Once you’ve gathered your documents, follow these steps for multistate filing:

  1. Calculate your taxable income by subtracting eligible expenses from the total award. For example, if you received $100,000 but paid $10,000 in legal fees and $5,000 in appraisal costs, you’d report $85,000 as income.
  2. File a nonresident tax return in the state where the property was located. Fill out all required forms, attach supporting documents, and pay any taxes owed by the deadline.
  3. File your regular tax return in your home state. Report the condemnation income, and claim any credits for taxes paid to another state if your home state allows it.
  4. Double-check all deadlines. Some states have earlier or later due dates than the federal tax deadline. Mark your calendar so you don’t miss them.
  5. Keep all records for at least 3-7 years, in case the tax authorities ask for proof later. Each state has different rules for how long you should keep records, but longer is usually safer.

If any part of this process seems confusing, don’t hesitate to ask a tax professional for help. It’s better to ask now than to face problems down the road.

Special Considerations: Partnerships, Trusts, and Inherited Property

Not all property is owned by just one person. Sometimes, it’s held in a partnership, a trust, or inherited from someone else. Each of these situations comes with its own set of rules for multistate filing.

Partnerships: If you own property as part of a partnership, each partner is responsible for reporting their share of the award. For example, if you and your sibling own a building together and it gets condemned, each of you must report half the award on your own state and federal tax returns. If one partner lives in the source state and the other does not, each person files the right forms for their own situation.

Trusts: If a trust owns the property, the trustee is in charge of reporting the award income. The trust might have to file in multiple states, especially if beneficiaries live in different places. The trust’s tax return will show the award as income, and the individual beneficiaries may also have reporting requirements in their home states. It’s important for trustees to communicate with beneficiaries so everyone files correctly.

Inherited property: If you receive property through inheritance and then it’s condemned, you need to figure out your “basis.” This is the value used to calculate your taxable gain or loss. Usually, inherited property gets a “stepped-up” basis, which means it’s valued as of the date the person passed away. If you sell or lose the property soon after, your taxable gain may be less than you think. Still, you’ll need to follow multistate filing rules and keep clear records showing how you calculated everything.

For all these special cases, documentation is key. Keep every piece of paperwork, award letters, trust agreements, partnership documents, inheritance paperwork, and any correspondence with tax authorities. And don’t be shy about asking for help. These cases are complicated, and an experienced advisor can save you time, stress, and money.

Additional Tips for Smooth Multistate Filing

Handling taxes in more than one state isn’t easy, but there are ways to make the process smoother. Here are some practical tips:

  1. Start early. As soon as you know your property might be condemned, begin gathering documents and learning about state tax rules. You’ll avoid last-minute panic and costly mistakes.
  2. Use state tax websites. Most states have detailed guides and FAQs for nonresidents. These can explain which forms to use, what counts as income, and how to claim credits. For example, New York’s Department of Taxation offers a helpful FAQ for nonresidents.
  3. Don’t ignore local taxes. Some cities or counties have their own requirements. Always check if your property was in a place with extra local taxes or fees.
  4. Communicate with co-owners. If you share ownership, talk with other owners early so everyone knows their responsibilities. This helps avoid confusion and missed filings.
  5. Double-check how the award will affect your federal taxes. While this article focuses on state taxes, the IRS also wants to know about condemnation payments. You may need to report the award as capital gain or ordinary income, depending on your situation.
  6. If you’re planning to reinvest the money, ask about “like-kind exchange” options or other ways to defer taxes. Sometimes, you can delay paying tax if you use the award to buy a similar property within a certain time frame, but the rules are strict and you need to act quickly.

Why Work With a Specialist?

Most people only deal with condemnation and multistate tax filing once or twice in their lives. The paperwork, different state laws, and tight deadlines can quickly become overwhelming. Small mistakes can lead to overpaying taxes, missing valuable deductions, or facing penalties.

A specialist in condemnation and multistate filing can make the process much easier. Here’s how they can help:

  1. Review your documentation for accuracy and completeness, so you don’t miss any eligible deductions or credits.
  2. Prepare and file all required state and federal tax forms, making sure you meet every deadline.
  3. Explain complicated rules in plain language, so you understand what’s happening and why.
  4. Represent you if state tax authorities have questions or want more information, saving you time and stress.
  5. Offer strategies to reduce your overall tax bill, like deferring taxes through reinvestment options or structuring the award in a tax-efficient way.

Real-world example: One client owned farmland in Kansas but lived in Arizona. After a condemnation, he tried to handle the taxes himself. He missed a key filing deadline in Kansas, which triggered penalties and a state audit. After hiring a specialist, he got the filings fixed, claimed credits on his Arizona return, and saved thousands of dollars in penalties and double taxation. This kind of peace of mind is worth far more than the cost of professional help.

If you’ve received an out of state owner award or think you might soon, consider working with someone who knows the ins and outs of these cases. You’ll save time, reduce stress, and often end up owing less in taxes.

Conclusion

Getting an out of state owner award is more than just cashing a check, it’s about handling state and local tax rules, gathering the right documents, and making sure you don’t pay more than you should. With a little preparation, the right information, and the support of an experienced professional, you can file your taxes with confidence and avoid expensive mistakes.

Got questions or want help with your multistate filing? Contact us today for a no-pressure consultation. We’ll review your situation and help you take the next step, so you can move forward with peace of mind.