We understand that as an eminent domain attorney, your focus is on securing the best possible outcome for your client — not navigating the tax consequences of a large condemnation award. Providing tax advice is outside your lane, and it should be. That is exactly why we are here. Tax Alpha Companies exists to step in the moment a settlement is reached, so your clients don't walk away from a hard-fought victory only to lose a significant portion of it to avoidable taxes. You win the case. We protect what comes next.
From the Editor — Steve Medendorp, Esq.
The Partial Taking Is Won. Now the Real Work Begins.
I spent years on the legal side of condemnation cases, and I can tell you that the moment the ink is dry on the settlement or the gavel comes down is not the end of the story for your client — it is the beginning of a different kind of fight. The condemning authority moves on. The client is left holding a check and a set of tax consequences that nobody warned them about.
Partial takings are where I see the most money left on the table. Severance damages — the compensation for what happens to the land that wasn't taken — are one of the most misunderstood and underutilized tools in condemnation tax planning. When properly allocated before closing, they can absorb a significant portion of the award against basis, reducing or eliminating taxable gain entirely. When ignored, they're treated as ordinary sale proceeds and taxed accordingly.
This month we go deep on severance damages — how to maximize the allocation in negotiation, what appraisal evidence the IRS actually requires, and how Rev. Rul. 83-49 opens reinvestment options your client may not realize exist. We close with a first look at depreciation recapture strategy, which will carry into September.
If any of this connects to a client situation you're working through right now, I'm happy to be a resource. There's a link below to put something on the calendar.
Steve Medendorp, Esq. Editor, The Condemnation Tax Brief · Tax Alpha Companies
▶ Quick Hits — This Month at a Glance
Click the bullet number to jump directly to that article.
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01 — Severance damage allocation is not automatic — it must be negotiated with the condemning authority and written into the closing documents before the deal is done.
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02 — The IRS requires credible appraisal evidence to support a severance damage allocation — without it, the entire award is presumed to be for the property taken.
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03 — Rev. Rul. 83-49 allows severance damages deferred under § 1033 to be reinvested in like-kind property beyond just the retained parcel — expanding your client's options significantly. Continued from July's severance damages series.
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04 — Depreciation recapture in a condemnation is not one number — § 1245 and § 1250 recapture are calculated separately and taxed at different rates. Next month: a full recapture planning strategy session.
In a partial taking, the client doesn't just lose property — they lose basis, they face severance damage questions, and they're sitting on a reinvestment clock they may not know is running. This month's issue is a practical field guide to the tax moves that happen after the gavel comes down. The difference between a client who keeps their award and one who doesn't is almost always whether someone raised these questions before the closing papers were signed.
Severance Damages — Maximizing the Allocation
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Maximizing Severance Damage Allocation — The Negotiation Happens Before the Closing, Not After
In a partial taking, the condemning authority is paying for two things: the property actually taken, and the damage done to what remains. The second payment — severance damages — is where significant tax planning lives, and it is almost entirely controlled by what gets written into the closing documents before the transaction is finalized.
Practitioner Note
The settlement agreement should identify the allocation between property taken and severance damages in explicit dollar amounts — not percentages, not ratios. The IRS requires the allocation to appear in writing; a subsequent letter or memorandum after execution will not substitute. If your client is still at the negotiating table, this is the conversation to have today.
What Appraisal Evidence the IRS Actually Requires — and What Won't Hold Up Under Scrutiny
A severance damage allocation in the settlement agreement is necessary — but it is not sufficient. The IRS requires that the allocation be supported by credible appraisal evidence demonstrating the actual damage done to the retained parcel. Without that support, the IRS can challenge the allocation and recharacterize the entire award as proceeds from the property taken.
A Note on Settlement Language — Less Is Best
Our approach is intentionally straightforward: keep the settlement document simple. A single global settlement number without granular allocation detail preserves flexibility for your client's tax team to make the most favorable supportable interpretation of what was taken and why. Attaching appraisals or itemizing components in the settlement itself gives the IRS a roadmap — and eliminates room for professional judgment. The detailed analysis belongs in the client's close-out file, not the settlement agreement. When in doubt, less detail in the formal documents is almost always the better outcome for the client.
Rev. Rul. 83-49 — Reinvestment Beyond the Retained Parcel · Continued from July
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Rev. Rul. 83-49 — Your Client Isn't Limited to Restoring the Retained Parcel
The default assumption when severance damages exceed the retained parcel's basis is that the excess is taxable gain. Revenue Ruling 83-49 significantly expands what a client can do with that excess — and most practitioners are not using it.
Rev. Rul. 80-184 — What Happens When Severance Damages Exceed Basis
Rev. Rul. 80-184 addresses the scenario where severance damages reduce the basis of the retained parcel to zero and the excess is received. The IRS treats the excess as gain realized in the year of receipt — not deferred. However, if the client makes a § 1033 election and acquires qualifying replacement property within the replacement period, that gain can still be deferred. The two rulings work together: 80-184 defines when gain is triggered; 83-49 shows how to defer it.
Depreciation Recapture Strategy — Preview of September
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§ 1245 and § 1250 Are Not the Same Number — Here Is Why That Distinction Matters in a Condemnation
Most clients — and many advisors — treat depreciation recapture as a single line item. It is not. In a condemnation involving commercial or income-producing property, recapture is calculated separately under two different Code sections, taxed at two different rates, and triggered at two different points in the transaction.
Understanding the split before the award is received determines how the client plans for cash flow in the year of the taking. September's issue will build out a full recapture planning framework — including how to sequence the reinvestment election around the recapture liability. Next month: a full § 1245/§ 1250 planning strategy session.
Quick Reference
§ 1245 recapture: personal property and equipment → taxed as ordinary income → recognized in year of receipt regardless of § 1033 election. § 1250 recapture: depreciated buildings and structural components → unrecaptured § 1250 gain → maximum 25% federal rate → may be deferred if § 1033 election is properly made. Run the recapture calculation before the award closes so your client knows what cash they will owe regardless of reinvestment.
The Supreme Court has accepted certiorari in a case arising from North Dakota, where a private pipeline company used federally-conferred eminent domain powers to take land from ranchers — then left the landowners with hundreds of thousands of dollars in unanticipated costs. The question before the Court is whether private companies holding certificates of public convenience can exercise condemnation authority that effectively shifts financial burdens onto property owners beyond just compensation. The decision will have significant implications for pipeline corridor cases nationwide and for how "just compensation" is calculated when private entities are the condemning party.
Have a client situation you want to think through?
Steve Medendorp works directly with eminent domain attorneys to analyze tax exposure after a condemnation award. No pitch, no obligation — put something on the calendar and let's talk through the situation.
This communication is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.
Matt Chancey, Ross Brannon, Johnny Borrelli and Jacob Harvey are Registered Representatives of Crescent Securities Group, Inc. ("CSG"), Member FINRA/SIPC and an Investment Advisory Representative of Crescent Advisor Group, Inc. ("CAG"), an SEC Registered Investment Advisor. Neither CSG or CAG are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Brokerage services offered through CSG. Investment advisory services offered through CAG. Steve Medendorp is a Florida licensed attorney but does not provide any legal or tax advice. Steve Medendorp and CSG or CAG are not affiliated.
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