425-398-5708
Appraisers, Attorneys, Eminent Domain

Relocation Advisory Services – What are they? What happens when they’re not properly provided?

Leave a comment

The Uniform Relocation Assistance and Real Property Acquisition Policies Act (URA), for federally assisted programs, requires condemning public agencies to provide relocation advisory services as described in CFR 24.205(c).  Find out what can happen to a business while relocating from a public project when the condemning agency stumbles with this requirement, and, hear some solutions.

As a relocation consultant, I’m looking forward to sharing insights on this subject at this seminar:  7th Annual Eminent Domain; Current Developments in Condemnation, Valuation & Challenges, June 5th and 6th 2014, in Portland, OR

Eminent domain attorneys, appraisers, and public agency representatives should hear this.

The seminar is arranged by The Seminar Group.  Following is the link to the agenda and registration: http://www.theseminargroup.net/seminar.lasso?seminar=14.EMDOR

 

Martyn Daniel LLC provides relocation consulting, cost-to-cure designs and estimates, and replacement cost estimates within the right-of-way industry for public and private sectors around the U.S.

 

Appraisers, Attorneys, Eminent Domain, relocation

Eminent Domain, Condemnation, and Uniform Relocation Act Benefits Seminar

Leave a comment

I’ll be speaking on the Uniform Relocation Act Benefits at the Second Annual Eminent Domain and Condemnation seminar in Honolulu on August 21, 2013.  You can take home new information from a lineup of talented faculty sharing their latest valuable updates, tips, and information.

Find out more and register at http://www.theseminargroup.net/seminar.lasso?seminar=13.EMDhi#

I hope to see you there.

 

Martyn regularly speaks around the U.S. on eminent domain issues including relocation, cost-to-cure, and replacement costs at gatherings of property/business owners, law firms, and continuing legal education seminars.

Eminent Domain

Just Compensation and Relocation Payments for Fixtures and Personal Property within Eminent Domain and the Uniform Act (URA)

Leave a comment

There have been many disappointed businesses owners when finding how much out of pocket, non-reimbursable money they spent to relocate their business due to a public project taking their property. The federal relocation guidelines don’t automatically guide the business to the best relocation results. To achieve the best results, each business relocation small and large, must have some level of analysis performed to distinguish between personal property and real property, as well as, to determine the proper amounts and best methods for receiving relocation payments from the public agency while following the relocation guidelines.

To emphasize this, recently while planning a business relocation, our personal property analysis determined that a refrigeration unit was improperly classified by the public agency’s appraiser as a non-moveable fixture. The appraiser also determined that it added no value to the property so it contributed no funds to the just compensation, so it had zero value. Furthermore, because the unit was classified as real property, there were no relocation benefits available for it.

We analyzed the refrigeration unit and were able to successfully demonstrate to the public agency that the unit was actually a moveable trade fixture, therefore considered personal property and entitled to relocation benefits. Further analysis demonstrated the cost to substitute the unit with a new unit was slightly less than the estimated $1 million to move and reinstall the existing unit.

This analysis resulted in the business receiving a new refrigeration unit at the replacement property with no out of pocket costs for the business, and very importantly, no downtime for the business, which would have occurred had they relocated the existing unit.

There are four possible methods of receiving compensation for a piece of equipment or personal property depending on its classification and the needs for the item, they are:

As Real Property
1. Payment within just compensation when the item is classified as real property because it’s a non-movable fixture

As Personal Property within the relocation benefits when the item is classified as a movable fixture or personal property, which includes choices of payments as follows:
2. As abandoned personal property
3. As relocated personal property
4. As substituted personal property

A basic comparison of how acquisition and relocation proceeds related to fixtures and personal property are described and calculated as follows:

As Real Property (non-movable fixture):

Let’s say an air compressor was determined to be a non-movable fixture, therefore it is real property, and it has an appraised value of $5,000. (Often, the value can be zero when the item does not contribute to the value of the property)

Non-movable fixtures are purchased as real property by condemning agencies. Within the real property acquisition payment the property owner would receive the $5,000 for the air compressor in our example. Payments for real property are subject to capital gains tax, although the tax can be deferred with a 1033 exchange. Currently the capital gains tax rate for most businesses is at 15%. If the tax is not deferred and the compressor has been fully depreciated, the property owner would be subject to capital gains tax of $750, for a net of $4,250. (This should be reviewed by your tax advisor.)

Side notes:
• Non-movable fixture payments typically are paid to the real property owner, not the tenant, which may have purchased and installed the fixture.
• Fixtures on occasion will include foundations, electrical and plumbing infrastructure. Receiving additional compensation for these items as non-movable fixtures will eliminate the ability to receive cost reimbursements for these items when reinstalling the personal property that the foundations or infrastructure serve.

As Personal Property and/or Movable Fixture:

Let’s say the same air compressor described above was determined to be a movable trade fixture, therefore personal property. The business has three choices in dealing with the air compressor:

• Abandon
• Relocate/Move
• Substitute

Abandon
When the item of personal property is not needed at their replacement location, or the business does not relocate, the business may want to receive a payment for abandonment of the personal property.

The federal relocation guidelines’ payment formula for abandoning personal property is the lessor of the value-in-use or the estimated cost to relocate the item.

If the cost to relocate the air compressor is estimated at $10,000 then the lessor value is the value-in-use of $5,000. The business would then receive the $5,000 as part of their relocation benefits which is non-taxable.

Relocate/Move
When the personal property item is needed at the replacement location, then an analysis should include the costs for relocating the item including disconnecting, moving, foundations, reconnecting, and modification if necessary. The actual cost to relocate the compressor will be paid to the business, which in this case is $10,000. This payment is non-taxable.

Substitute
When the function of the personal property is needed at the replacement location, there may be a desire to analyze the substitution costs for the item.

The federal relocation guidelines’ payment formula for substituting personal property is the lessor of the estimated cost to move/relocate the item or the actual cost to substitute the item.

Let’s say the relocation cost of $10,000 includes costs to disconnect and modify the compressor to fit the location which will not be incurred when substituting the unit, and we find we can buy and install a new compressor that will fit the new location without modification for $9,000. The owner can then receive a substitution payment of $9,000 and enjoy the benefits of a new compressor at the replacement location. This payment is non-taxable.

Conclusion
This information will clarify the dollars at stake and emphasize the need to analyze the best method to receive payments for an asset. Based on our example of the air compressor are the following results:

  • Non-Movable Fixture – Payment resulting in $4,250, or $0 if the item does not contribute value
    • This payment will likely be paid to the real property owner.
    • If the compressor is needed at the replacement location the business will have to spend $5,999 to replace it
  • Abandonment of Personal Property  – Payment of $5,000 (non-taxable)
    • The business receives value for an item no longer needed.
  • Relocation/moving  – Payment of $10,000 (non-taxable)
    • The compressor continues to function as it did at the acquired property with no out of pocket expenses for the business.
  • Substitution – Payment of $9,000 (non-taxable)
    • The function of the compressor is replaced with a new compressor with no out of pocket expenses for the business.

Each business relocation and its payments are different because of the different types of personal property the business has and the future plans of the business, requiring separate analysis for each business.

This explanation should clarify an often overlooked and important monetary issue that will occur during relocation of the business and the acquisition of the property.

If you wish to discuss this further or should you have any questions, or comments, please contact me…..

Martyn Daniel

Appraisers, Attorneys, business relocation, Businesses, Condemnation, Eminent Domain, eminent domain taxes, Property Owners, relocation

Eminent Domain Acquisition Payments, Relocation Payments, and Taxes

Leave a comment

For certain situations, the case of  Karen Y. Nielsen v. Commissioner of Internal Revenue provides some answers for understanding how income taxes apply to eminent domain acquisition and relocation payments.  As an eminent domain relocation consultant, not a tax advisor, I’ve prepared the analysis below based on the information from this case.  This analysis and suggestions are for a typical acquisition of private property and relocation of a resident, business, non-profit, or farm located within a public project using eminent domain and federal funds to acquire property and relocate the occupants.

This case indicates that:

  • The acquisition payments made for just compensation of real property may be taxable as a capital gain or deferred by use of IRC section 1033.
  • Relocation payments are not considered income and not taxable.

That seems clear and simple. However, the key is to separate real property acquisition payments from relocation payments. When possible, it will be helpful to work with the public agency making the payments to clarify the type of payment being made.  However, it may not be clear between the two types of payments, particularly when there was a settlement in mediation or court.

Moreover, it’s important to identify and properly classify movable fixtures (personal property) from non-movable fixtures (real property). It’s preferable to do this before the move and before relocation payments are made.  I’ve spent a great deal of time making these distinctions for relocation planning purposes by analyzing the characteristics of installed equipment to compare them to various states’ methods for distinguishing between personal property and real property.  The typical test for fixtures is the three-part test known as the Teaff method. Now, as we see, this task is equally important for tax planning within the relocation planning.

Below are my suggestions for recognizing and separating acquisition payments from relocation payments.

Acquisition Payments (Just Compensation) – Payments for the items listed below appear to be taxable as a capital gain but may be deferred by use of IRC 1033:

  • Real property including; land, buildings, and other improvements including; driveways, utilities, well, septic system, landscaping, etc.
  • Fixtures (non-movable, or permanent) The 3-part Teaff test may be needed to determine this fixture classification.

Relocation Payments – Payments or reimbursements made for the items below should be non-taxable to the displaced resident or business. The items listed are major categories within the Federal Uniform Relocation and Acquisition Act, which are eligible for reimbursement or payment.  See my abbreviated version of the URA relocation benefits for a full but abbreviated list of eligible reimbursable relocation costs. (Another time, I’ll expand on these categories and their sub-categories in more detail) 

 Resident (homeowner or tenant)

  • Moving and reinstallation of personal property, storage, and other moving related costs
  • Replacement Housing Payment or Price Differential payment
    • Amount by which the cost of the comparable replacement dwelling exceeds the acquisition amount of the displacement dwelling
  • Increased interest on the replacement dwelling
  • Expenses incidental to the purchase of the replacement dwelling
  • Other remedies within the Housing of Last Resort

Business or Farm (property/business owner, landlord business, business tenant, non-profit, farm)

  • Fixed Payment, also known as the In-Lieu Payment
  • Moving Costs including 16 line items of eligible reimbursable costs
  • Reestablishment Costs Including 7 line items of eligible reimbursable costs
  • Related Eligible Expenses including 3 line items of eligible reimbursable costs

Separating eminent domain payments by the categories described above will help you plan your tax obligations. This work will also help you properly plan your relocation and help you receive proper and timely relocation payments, when prepared before you move.

The above discussion is my opinion as an eminent domain and relocation consultant.  I recommend consulting a tax advisor prior to relying on this information for tax purposes.  I would be pleased to discuss the methods for separating personal and real property in more detail with you as a displaced person, your tax advisor, legal counsel, or your displacing public agency.

If you are searching for guidance on the proper handling of these tax matters, please feel free to contact me.  I’ll put you in touch with tax advisors who have worked in these situations and who I’ve discussed these matters with.

Eminent Domain

Eminent Domain, Condemnation, and Uniform Relocation Act Benefits Seminar

Leave a comment

I’ll be speaking on the Uniform Relocation Act Benefits at the Second Annual Eminent Domain and Condemnation seminar in Honolulu on August 21, 2013. You can take home new information from a lineup of talented faculty members sharing their latest valuable updates, tips, and information on eminent domain issues.

Find out more and register at http://www.theseminargroup.net/seminar.lasso?seminar=13.EMDhi#

I hope to see you there.

Martyn regularly speaks around the U.S. on eminent domain issues including relocation, cost-to-cure, and replacement costs at gatherings of property/business owners, law firms, and continuing legal education seminars.

Attorneys, Businesses, Eminent Domain, Property Owners

Facing Eminent Domain and Relocation? Get the Best Help from Those that Get the Best Results

Leave a comment

I had the great pleasure and experience with presenting a unique and customized approach to the eminent domain relocation process to the law firm, Sever/Storey, an eminent domain law firm for landowners. This energetic and collaborative group of attorneys quickly recognized how this unique relocation approach would benefit their landowner and business clients. Throughout my interaction with them, they clearly demonstrated their talent, energy, and commitment to provide the best and most complete service to their clients, which will undoubtedly provide the best results for their clients. If you are facing eminent domain or condemnation in Indiana, Illinois, Ohio, or North Carolina, you need to call Sever/Story at 888-318-3761.

Note: Martyn regularly speaks in many parts of the U.S. on relocation issues related to eminent domain, condemnation, and right-of-way to owners, businesses, and attorneys in group and private settings, as well as, to other professionals at continuing legal education seminars. Martyn can be reached at 425-398-5708.

Appraisers, Attorneys, Businesses, Eminent Domain, Property Owners

Are Eminent Domain Relocation Payments a 1033 Tax Exchange or Not Considered Income?

Leave a comment

Every year thousands of tax filers, and likely, their tax preparers, are dealing with tax issues related to relocation payments received for relocating a business or household from public projects where the government agency is using eminent domain and condemnation. As an eminent domain relocation consultant, my clients frequently bring up tax issues related to relocation payments, or reimbursements. Based on their comments, some tax preparers treat relocation payments as a 1033 exchange; some treat them as non-income; while others treat them as ordinary income.

Until recently, answers to tax issues related to relocation payments have been eluding me for 20 years. A few years back I called the IRS for answers. After nearly an hour on the phone with the agent grasping for answers, but not finding any, I heard a sneeze and a click. I was “accidently” disconnected. More recently, I quizzed nearly everyone I know working in the eminent domain field for a connection to someone that knows, only to find leads to dead ends.

Below are quotes from the Federal Uniform Relocation and Acquisition Act (URA) and the IRS, which cause me and others to ask more questions. I included an example of a project raising specific tax questions, and lastly are some common questions I’ve heard over many years from many clients.

All relocation programs for public projects using federal funding are based on the (URA) and include the following language, “No relocation payment received by a displaced person under this part shall be considered as income for the purpose of the Internal Revenue Code of 1954, which has been re-designated as the Internal Revenue Code of 1986 (Title 2, U.S. Code).” This leads to the IRS code which states, “42 USC § 4636 – PAYMENTS NOT TO BE CONSIDERED AS INCOME FOR REVENUE PURPOSES OR FOR ELIGIBILITY FOR ASSISTANCE UNDER SOCIAL SECURITY ACT OR OTHER FEDERAL LAW.” The language in these two items would lead one to believe that relocation payments are not income and therefore non-taxable.

Following is a brief, common, and recent example of a situation that further complicates this issue. On a public project using eminent domain and following the URA, we successfully argued that certain pieces of equipment should be reclassified as personal property and eligible for relocation payments, which includes an optional payment for abandonment of the personal property. The public agency had earlier classified these items as immovable fixtures, which would leave the items ineligible for relocation payments, and only eligible for smaller payments, which were based on their depreciated real property value.  The relocation payments received for these items reclassified to personal property where significantly higher.

To emphasize the magnitude of this tax issue on a business, this client received a payment from the public agency for abandoning several million dollars’ worth of the personal property. Abandoning personal property is part of the relocation benefits program; therefore, these payments along with payments made for relocating other personal property are considered relocation payments. Taking the language from the URA and IRS at face value, one would believe these payments are not considered as income, thus non-taxable. Is that a reasonable belief?

The tax issues for relocation payments raises some common concerns and questions, such as; treating relocation payments as a 1033 exchange leaves the possibility of a taxable event in the future, which seems contrary to the IRS code mentioned above. In addition, personal property does not seem to fit within the scope of the 1033 exchange. For tax purposes, should payments for abandoned personal property be treated different from relocated personal property, even though both payments are considered relocation payments and presumably non-taxable?

We spend a lot of time analyzing and planning to improve the outcome of our client’s relocation efforts, however, tax planning has been a missing component within those efforts. I have recently discussed these matters with tax advisors with experience in these situations and found that handling them is somewhat specific to the situation, therefore, if you contact me, I would be happy to refer you to them.

Martyn Daniel Eminent Domain Specialist