Eminent Domain

[Tim Hoffman]

I am a seasoned investor (15 years and over 60 SFH) in Northern Illinois. I have a property next to one of the local High Schools that is being taken for some school expansion projects. They have given me a good price (after 3 months of negotiating) and my question is this. I know I can do a like kind exchange (1031) to defer the capital gains but is there another way since it is via eminent domain? I have historically bought foreclosed property and forced appreciation. With the time limits of a 1031 I may have to overpay for a property and that is killing me just thinking about it.

As a side note, negotiating with a School District was a very interesting process. At the end of the day, their final offer was actually more than my previous figure (about $6k). They said they had deadlines to meet and they would give me the extra if I could close in 45 days. That day I gave my tenants a 30-day notice to move. Paid $51k about 7 years ago (about 6 mo before the bubble burst) and their final offer was $105k. I love real estate.

Thanx for all your help

[Bill Exeter]

Hi Tim,

You may qualify for a 1033 Exchange (Section 1033 of the Internal Revenue Code). The 1033 Exchange is for involuntary conversions such as eminent domain or natural disasters. You will qualify IF your property was actually taken via eminent domain or you were threatened with eminent domain.

It was not clear in your OP as to whether the city actually took your property via eminent domain or merely negotiated with you to buy your property. If the city did not actually take your property, you would have to demonstrate that you were threatened with eminent domain should you fail to sell your property to the city. The best ways to do this would be to have the city include language in the Purchase and Sale Agreement that they intend to take your property via eminent domain should you fail to close or they can put the same language in a letter to you. You need to show that you were threatened with eminent domain.

The other issue to keep in mind is that the definition of like-kind property pursuant to a 1033 Exchange is slightly more restrictive than a 1031 Exchange. If you stay with SFR's, you should be fine.