Virginia exempts gain from eminent domain condemnation from its income tax

Last month the Virginia General Assembly enacted a law, SB 1256, that exempts gains from takings by eminent domain from their state income tax. Government entities may invoke their power of eminent domain to take private property for public use. The Fifth Amendment to the U.S. Constitution requires that government entities provide the property owner with “just compensation” upon completing the eminent domain process. The Fourteenth Amendment extends these protections from federal takings without just compensation to state governments.

Tax laws generally treat proceeds that a property owner receives from eminent domain condemnation as though they were proceeds from a sale of the property. Section 1033 of the Internal Revenue Code, however, offers property owners an opportunity to roll over eminent domain proceeds into similar investments without recognizing gain, if done so within a roughly two to three year period following condemnation and meeting other requirements. The benefit is similar to a like-kind exchange for real property under Code Section 1031.

States generally use federal adjusted gross income or federal taxable income as the starting point to compute their income taxes, such that many federal tax benefits are reflected in state income tax laws. By enacting SB 1256, Virginia has now fully exempted gains from government takings by eminent domain for its state income tax purposes. The Virginia General Assembly provided an impact statement that describes the new law. We are following legislatures in other states to see if they may consider similar legislation for their own state income taxes as well.