Betty owns a horse farm with 500 acres of land (adjusted basis of $600,000).Fifty acres of the land are condemned by the state for $400,000 in order to build a municipal stadium.Since the fair market value of Betty's farm is significantly decreased by the proximity to the future stadium, the state awards Betty $300,000 in severance damages.Betty does not use the $300,000 to restore the usefulness of the farm and all of the $700,000 ($400,000 + $300,000) proceeds are invested in the stock market.What is her recognized gain or loss associated with the receipt of the severance damages?

Question

Quizplus · Accepted Answer

Severance damages are treated as part of the compensation for the condemned property. Since Betty did not reinvest the proceeds in similar property and instead invested in the stock market, the entire amount received for the condemnation ($400,000) and the severance damages ($300,000) is considered in calculating the gain. However, the question specifically asks about the gain associated with the receipt of the severance damages, not the total gain from both the condemnation proceeds and the severance damages. The severance damages themselves do not directly result in a recognized gain or loss because they are part of the overall compensation for the condemnation, which is calculated against the basis of the property affected. The calculation of gain or loss would consider the entire proceeds ($700,000) against the basis of the condemned portion of the property and the impact on the remaining property, but the question's focus on the severance damages alone and their use does not directly lead to a recognized gain or loss without considering the broader context of the total compensation and its comparison to the basis of the affected property.

Betty Owns a Horse Farm with 500 Acres of Land