Tax Implications of Property Ownership and Eminent Domain in Texas

Owning property in Texas comes with many benefits, but also with complex legal and tax responsibilities. When that property is affected by eminent domain, those responsibilities shift, sometimes dramatically. Whether you’re facing a potential government taking or simply want to understand the implications, it’s important to know how both property ownership and eminent domain impact your tax obligations.

Understanding Property Taxes in Texas

Texas does not have a state income tax, but it does have some of the highest property taxes in the country. Property taxes are assessed locally, based on the appraised value of your property, which includes both the land and any improvements like homes or buildings.

The tax burden can be substantial, particularly as property values increase. However, Texas offers several exemptions, such as the homestead exemption, which can reduce the taxable value of your primary residence. Other exemptions are available for seniors, individuals with disabilities, and veterans.

It’s important to stay current on your tax assessments and appeal them if you believe your property has been overvalued. Failure to pay property taxes can result in penalties, interest, and eventually a tax lien or foreclosure.

Eminent Domain and Property Takings

Eminent domain is the government’s legal authority to acquire private property for public use, such as constructing highways, pipelines, or public infrastructure. In Texas, both government entities and certain private companies (like utilities) may exercise this power. However, the Fifth Amendment of the U.S. Constitution and Article I, Section 17 of the Texas Constitution require that the property owner receive “just compensation.”

What qualifies as “just” is often the subject of legal disputes, and the process can be emotionally and financially stressful for property owners.

Tax Consequences of an Eminent Domain Award

If your property is taken through eminent domain, the compensation you receive may trigger tax consequences. Generally, the government payment is treated as a sale for tax purposes, which means you could be subject to capital gains tax if the amount received exceeds your adjusted basis in the property.

For example, if you purchased a piece of land for $100,000 and the government compensates you $220,000, you may be taxed on the $120,000 gain. This applies whether you accept the initial offer or reach a higher amount through negotiation or litigation.

However, certain strategies can help reduce or defer your tax burden:

• Involuntary Conversion under IRC §1033: If your property is taken involuntarily, you may defer capital gains taxes by reinvesting the proceeds into a similar property within a set timeframe (typically two to three years). This is similar to, but distinct from, a 1031 exchange.
• Installment Sales: In some cases, payments are structured over a period of time. This can spread out the tax liability over several years, though not all takings are eligible for this treatment.
• Basis Adjustments: If you’ve made improvements to your property or can prove certain costs, you may be able to increase your basis and reduce the taxable gain.

Each of these strategies has its own qualifications and risks, and applying them without careful planning can lead to costly mistakes.

Contact Coleman Jackson, P.C. Today To Learn More

At Coleman Jackson, P.C., we understand the unique challenges Texas property owners face when dealing with eminent domain. Our firm brings together experienced tax law counsel to help you navigate every stage of the process, from valuation disputes to tax planning and beyond.

If your property is at risk of condemnation or you’ve already received compensation, don’t wait to understand the tax implications. Contact our office today to schedule a consultation.

This law blog is written by the attorneys at Coleman Jackson, P.C., located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes only. It does not create an attorney-client relationship between this law firm and the reader. You should consult with legal counsel in your geographic area regarding any legal issues affecting you, your family, or your business.

Coleman Jackson, P.C. | Tax Law, Business Law, Immigration Law | English: (214) 599-0431 | Spanish: (214) 599-0432.