What Are Severance Damages?

Ever wondered what happens when the government takes part of your land for a new road or public project? You might get paid for the land they take, but what about the rest of your property that’s now less useful? That’s where severance damages come in. Severance damages are payments made to a property owner when only part of their property is taken by eminent domain, and the remaining land loses value as a result. In other words, it’s compensation for the drop in value of what you still own.

Let’s say your backyard is split by a new highway. The part they take is paid for. But your remaining yard might be noisier, harder to use, or less private. Severance damages help cover that lost value. This isn’t just about inconvenience. Sometimes, the loss in value is significant enough to change your plans for the property entirely, like if you planned to build a pool or an addition, and now you can’t. Understanding the severance damages basis is important because it affects how much you’re owed and how the payment is treated for tax purposes.

How Severance Damages Are Calculated

So, how do experts figure out the amount you should get? The process starts by looking at your property’s value before and after the taking. The difference is what matters.

First, an appraiser estimates the fair market value of your whole property before any land is taken. Next, they determine the new value of your remaining property after the partial taking and any negative effects (like loss of access, view, or usefulness). Severance damages are the difference between these two numbers, minus the value of the land actually taken.

For example, if your property was worth $400,000 before and $350,000 after a partial taking, and the land taken was worth $30,000, the severance damages would be $20,000. This calculation is key to understanding your severance damages basis because it sets the amount you may receive and what counts as compensation for your loss.

Appraisers consider many factors beyond just square footage. Imagine a corner grocery store losing easy access for delivery trucks after a road project. Or a farm losing its irrigation system when a utility company installs new power lines. These impacts are reflected in the before-and-after values. Sometimes, the remaining property becomes oddly shaped or less practical for its original use, all of which should be considered in your compensation.

Why Severance Damages Basis Matters for Taxes

When you get a payment for severance damages, you might wonder: Will I owe taxes on this money? The answer depends on your severance damages basis, which is the portion of your original property’s cost that relates to the part affected by the taking.

Think of your property’s basis as what you paid for it (plus certain improvements), divided between the part taken and the part left behind. If the severance damages are less than your basis in the affected portion, you may not owe taxes. If the payment is more than your basis, the extra could be taxed as a gain. The IRS has specific rules for this, and it can get complicated.

Here’s a simple way to look at it: If you bought your property for $300,000, and the part taken plus severance affects one-third of your property’s value, then your basis in the affected part is about $100,000. If severance damages are $25,000, and the land taken is valued at $40,000, you compare these amounts to your basis to figure out taxes. If your total compensation, including severance, does not exceed your basis in the affected portion, you likely won’t have a taxable gain. But if the payment exceeds your basis, the difference may be taxable, usually reported as a capital gain.

For many people, this is new territory. The details can get tricky if you’ve made improvements, inherited the property, or use it for business. For example, if you inherited land, your basis might be the value at the time you inherited it, not what the previous owner paid. If you’ve added a garage or renovated, those costs can increase your basis, which could reduce your taxable amount if severance damages are paid. IRS Publication 544 explains the rules, but it’s easy to see why many property owners consult a tax advisor to get it right.

Common Impacts on Property Owners

Severance damages can affect more than just your wallet. When a partial taking happens, you might face changes like reduced access to your home, more noise, loss of privacy, or a tougher time selling the property later. These impacts can lower your property’s value, sometimes by more than the amount of land actually taken.

Think about a suburban home where a new power line runs right outside the living room window. Sure, you still own the house, but the view’s changed, and buyers might not be as interested. Or picture a farm where a drainage ditch cuts through the middle, making it harder to use your equipment or reach parts of your field. Even if the remaining property is technically usable, the hassle and lost potential future uses can be major.

Some property owners also find that their property’s usefulness drops, such as when a corner lot loses its best access or a business property sees fewer customers due to changes in traffic flow. For example, a restaurant that loses its main driveway may see a big drop in business, even though the building is untouched. All these factors are considered when calculating severance damages basis, and they play a big role in making sure you’re fairly compensated.

What to Do If You’re Offered Severance Damages

If you receive an offer for severance damages, don’t rush to accept. It’s smart to review the offer carefully and understand how the amount was calculated. Ask for a clear explanation of how the severance damages basis was determined, including what factors were used to value the before and after condition of your property.

You can seek a second opinion from your own appraiser or legal advisor. Sometimes, government offers miss important details about how the project will impact your remaining land. For example, maybe they overlooked a well or a right-of-way that’s essential to your property’s value. Or maybe they estimated your before-and-after values using outdated sales data from a different neighborhood. An independent appraisal can catch these issues.

Negotiating is common and often necessary. If you believe the offer doesn’t reflect the real impact, you’re allowed to push back. Gathering documents like your property deed, recent appraisals, and any correspondence about the project will help your case. You might also take photos that show how the changes affect your land, or collect statements from neighbors facing similar issues. The more information you have, the stronger your position.

How to Protect Your Rights and Get Help

Dealing with eminent domain and severance damages can feel overwhelming. But you don’t have to go it alone. There are professionals who specialize in helping property owners understand their severance damages basis, negotiate with the government, and handle the tax side of things.