Ever wondered what happens to your property’s tax basis when the government takes part of your land, leaving you with a smaller piece? This is where the concept of remainder basis severance comes into play. In this guide, you’ll learn what remainder basis severance means, why it matters if your property faces a partial taking, and how you can figure out the leftover land basis after severance damages.

What Is Remainder Basis Severance?

When a government agency takes part of your land for public use, say, for a new road or utility line, you don’t just lose the land. You might also receive compensation for the piece that was taken, and for any damage to the value of what remains. The remainder basis severance is a way to figure out how much of your original property’s tax basis should be assigned to the leftover land after a partial taking and any resulting damages.

Think of your property like a big pie. If someone takes a slice and leaves the rest, you need to decide how much of your original ‘investment’ now belongs to the part you still own.

Why Does Basis Matter After Partial Taking?

Your property’s tax basis is basically what you paid for it, including improvements, minus any adjustments. When part of your land is taken, this basis doesn’t just disappear. Instead, you need to split it between the part taken (the condemned portion) and the remainder (the land you keep). This matters because it affects how much tax you might owe if you later sell the leftover land or if you have to report gain from the damages received.

For example, if you have a two-acre lot and half an acre is taken for a highway, the basis after partial taking helps you figure out how much of your original purchase price is connected to the one and a half acres you still own.

Calculating the Remainder Property Tax Basis

So, how do you actually calculate the remainder property tax basis? The IRS provides some guidance, but here’s a simple way to look at it:

  1. Figure out your property’s total basis before the taking. This is usually what you paid for it, plus improvements.
  2. Determine the basis to assign to the taken part. This is based on the value of the part taken compared to the whole, or sometimes based on the amount you received in compensation if that’s easier to pin down.
  3. Subtract the basis you assigned to the part taken from your total original basis.
  4. The result is your leftover land basis, the remainder property tax basis.

Sometimes, the government’s taking damages the value of your leftover land. In that case, some of your basis might also be allocated to those damages. The key is to make sure the total basis is fully assigned, with nothing left unaccounted for.

Understanding Severance Damages and Their Tax Impact

Severance damages are payments for the loss in value to your remaining property after a partial taking. Let’s say your remaining land now faces a noisy highway, making it less valuable. The compensation you get for that lost value is called severance damages.

From a tax perspective, you have to allocate part of your original basis to both the land that was taken and to the damages received for the leftover land. Only the amount you get over your allocated basis might be taxable as a gain.

If you receive severance damages, the remainder basis severance calculation helps you figure out:

  1. How much of your original basis is used up by the damages
  2. How much basis remains for the leftover land

This is important when figuring your taxes now, and also in the future if you sell what’s left of your property.

Practical Example: How Remainder Basis Severance Works

Imagine you bought a property for $100,000. The government takes a strip of it for $25,000 and pays you another $10,000 for the loss in value to what’s left. Here’s how you’d figure it out:

  1. Your total original basis is $100,000.
  2. Let’s say $20,000 of your basis is allocated to the strip taken.
  3. Maybe $8,000 of your basis is allocated to the severance damages.
  4. Now your leftover property has a basis of $72,000 ($100,000 minus $20,000 minus $8,000).

This leftover land basis will be important if you ever sell your property later. The IRS expects you to keep good records of how you split up your basis after a partial taking.

Tips for Handling Leftover Land Basis and Taxes

Dealing with basis after partial taking can get complicated, especially if you’ve owned your property for a long time or made lots of improvements. Here are some practical tips:

  1. Keep all your records, including your original purchase documents, improvement receipts, and any paperwork from the government about the taking.
  2. Work with a tax professional or attorney who has experience with eminent domain cases and remainder basis severance. They can help make sure your calculations are right and you don’t overpay on taxes.