You may have a gain or a loss on condemnation, or you may not have any gain or loss, depending on what type of condemnation award you receive.
When You Receive Similar Property
If you receive property in a condemnation, that is similar or related in service and use to your original property that was condemned, you do not have any gain or loss. Your basis in the new property is the same as your basis in the old property.
When You Receive Money or Unlike Property
You would ordinarily have to report the gain or loss on condemnation, unless the property was your main home and you qualify for an exclusion. But you can postpone recognition of the gain by buying replacement property. Buying replacement property includes buying at least an 80% interest in a corporation that owns property that is similar or related in service or use.
In order to postpone all of the gain, the amount you spend on replacement property must be at least as much as you realized on the condemnation. If you spend less than that amount on replacement property, you will have to recognize the excess, unspent amount as a taxable gain. Your basis in the replacement property will be its cost, reduced by any unrecognized gain (the gain you are able to postpone) on the condemnation.
Postponing Gain on Severance Damages
If part of your property is condemned, and you receive severance damages for the remaining part, in addition to a condemnation award for the condemned part, you can postpone gain on both the severance damages and the condemnation by buying replacement property. If the replacement property costs at least as much as the total of your net severance damages plus your net condemnation award, you can postpone the entire gain.
Replacement property, for purposes of postponing the gain, includes nearby property that will allow you to continue your business, if the condemned property was business property. If nearby property is not available, you can sell your remaining property after the condemnation and then postpone any gain realized on the sale by buying replacement property.