Ever wondered what happens if the government takes only part of your property for a project? You might be owed more than just payment for the piece they take. The process of partial taking severance allocation decides how much compensation you get, how it’s split, and how you should report it come tax time. In this guide, you’ll learn what severance damages are, how awards get divided, and what you need to know about reporting payments if you’re affected by a partial taking.

What Is Partial Taking and Severance Damages?

When the government, or another authority, uses eminent domain to take part of your property, it’s called a partial taking. Unlike a full taking, you keep the rest of your property. But here’s the catch: losing a portion can lower the value of what’s left. That’s where severance damages come in. Severance damages are extra money paid to cover the drop in value of the remaining property due to the partial taking.

For example, if part of your front yard is taken for a new road, your house might be closer to traffic, which could make it less attractive to buyers. Severance damages are meant to make up for this loss.

How Severance Damages Are Calculated

Figuring out severance damages isn’t always simple. Appraisers look at how the partial taking affects your remaining property. They consider things like access, appearance, use, and value. The process usually involves these steps:

  1. Calculate the value of the entire property before the taking.
  2. Estimate the value of what’s left after the taking.
  3. The difference is the total loss in value, which could include both the value of the land taken and the severance damages.

Let’s say your property was worth $500,000 before, and after the partial taking, it’s worth $420,000. If the portion taken is worth $60,000, the remaining $20,000 is considered severance damages because the leftover property lost value for reasons beyond just losing land.

Allocating Severance Award: What Goes Where?

After the total award is decided, the next step is allocating the severance award. This means splitting the payment between the part that pays for the land actually taken and the part that covers damage to the remainder. The way this split happens matters for both legal and tax reasons. Usually, the amount paid for the land taken is straightforward, based on its fair market value. The severance part covers the drop in value to the remaining property. Sometimes, the government or court will specify the breakdown.

If not, property owners should work with an appraiser or attorney to make a reasonable allocation. Good records are important because the IRS may ask how you assigned the values.

Tax Reporting: How to Handle Remainder Damage Payment

Reporting payments from a partial taking can be tricky. The IRS treats the money differently, depending on what it’s for. The payment for the land taken is usually treated as a sale, possibly triggering capital gains tax if you made a profit. Severance damages, or the remainder damage payment, are reported differently. If you use the money to fix or improve what’s left of your property, you might not have to pay taxes on that amount. But if you keep the severance damages or spend them elsewhere, they could count as taxable income.

It’s important to keep documentation showing how much you received for each part and how you spent any remainder damage payment. This can help you avoid problems at tax time.

Why Good Allocation Records Matter

Having clear records of your partial taking severance allocation isn’t just smart, it’s essential. If the IRS reviews your return, they’ll want to see how you split the award between land taken and severance damages. Without this, you could end up paying more tax than necessary, or even face penalties. Good records also make things simpler if you ever decide to sell the remaining property. You’ll have proof of how the property’s value changed and what parts of the compensation were taxed.

When to Seek Professional Help

Partial takings and severance damages can get complicated quickly, especially if there’s a dispute about values or how to allocate the award. If you’re not sure how to move forward, or if you want to make sure you report everything correctly, it’s a good idea to reach out to an expert. Attorneys and tax professionals who deal with eminent domain can help you protect your rights and keep your taxes in order.

If you’re facing a partial taking, understanding severance damages and how to allocate and report your award can make a big difference. Don’t leave money on the table or risk a tax mistake. Contact us to learn more.