Three Years to Reinvest Condemned Farm Land!

We had a reader ask the following question:

“I have new state highway coming through one end of one farm. How is the money received taxed ? Do I have any options for reinvestment without paying tax.”

Whenever, farmland is condemned (or threatened to be condemned) for a new road or other use, the tax laws are very generous with allowing the taxpayers to reinvest the proceeds from the condemnation in other farm land. 

The taxpayer has three full tax-years after the year of the condemnation to reinvest the proceeds in other farm land.  However, the taxpayer is allowed, if they so desire, to reinvest their proceeds in other real estate of “like kind”.  This definition is much broader than the normal similar-use requirement for other types of involuntary conversions such as a fire, etc. which would only allow two years to reinvest the proceeds into similar-use property.  This means that the farmer in this case, could reinvest the funds in a duplex in town or most any other type of real estate.  They are not restricted to reinvesting in farm land.

Therefore, the answer for this reader is that if the condemnation occurs in 2011, they will have until December 31, 2014 to reinvest the proceeds into other real estate.  This period may be shortened if there was an ongoing threat of condemnation that had started before 2011.  In either case, the reader must review this with their tax advisor to make sure the transaction is reported correctly and the gain deferred properly.