By Ryal W. Tayloe, Ward and Smith, P.A.
Editor’s Note: Ryal W. Tayloe is a member of the Litigation Practice Group at Ward and Smith, P.A.
Although it seems contrary to some of the most revered of the "fundamental rights" protected by the United States and North Carolina Constitutions, one of the most ancient powers of government is the power of eminent domain which allows the involuntary taking ("Taking") of private property from the owner for a "public purpose." In fact, the United States and the North Carolina Constitutions recognize this necessary power of government by providing that private property may not be taken for a public purpose unless "just compensation" is paid to the owner.
Who Can Take Private Property Against the Owner’s Will?
In North Carolina, there are many public, semi-public, and private entities that have the power to take property against the owner’s will. The Department of Transportation ("DOT") is the most well known, but others include municipalities, counties, school boards, water and sewer authorities, natural gas companies, railroads, and telephone companies, to name a few.
For What Purposes Can Private Property be Taken?
Your Property can be taken from you only for a public purpose. Federal and North Carolina courts have been very liberal in determining that a public purpose exists and, as a result, the public purpose requirement usually is not difficult for the condemning agency to prove. A judge will make the determination of whether the Taking of your property is for a public purpose, but the issue of just compensation will be made by a jury consisting of your peers.
Initial Valuation of the Property to be Taken
Typically, the condemning agency will have done a significant amount of groundwork before approaching you to discuss the acquisition of your property. By the time you are contacted, engineers will have completed the design work for the intended project, and appraisers will have been consulted as to the value of your property. This appraisal work, however, often is part of a large body of appraisal work for the entire project and the appraisers may not have taken into account all of the factors that make up the value of your property. Furthermore, appraising value is the art of predicting the sale price for a specific piece of property if a willing buyer and a willing seller were to negotiate fairly without any unusual pressure to buy or sell.
It sometimes is surprising to see how two similarly-qualified appraisers differ drastically as to the "just compensation" issue with respect to the same piece of property. Thus, while the condemning agency will approach you armed with an "appraisal" of the value of your property, you are free to negotiate a different price for a voluntary purchase (which the agency may take to avoid having to litigate the issue of value), and it would not be unusual, if a Taking proceeding becomes necessary, for your final award to bear little resemblance to the value stated in the initial appraisal.
The condemning agency may elect to take only an easement for a particular use or uses over or under your property, rather than your entire ownership interest in the property. If that is the case, the description of the use or uses for which the condemning agency is obtaining a right is very important to the just compensation issue. In North Carolina, the owner of property over which someone else has an easement typically has the right to continue to use the property as long as the owner’s use does not unreasonably interfere with the easement holder’s permitted use of the easement area.
For example, if the condemning agency takes only an easement under your property for the underground installation of a sewer line, you may retain the right to drive, farm, or grow a nice lawn on the property over the easement area. You, however, no longer would have the right to install an in-ground swimming pool on the same area. Because you would retain the right to use the property for some, but not all, uses, the just compensation due to you for the Taking of the easement likely will be less than the just compensation which would be due to you if the Taking involved your entire ownership interest in the property. Again, however, appraisers can differ on this issue.
Highest and Best Use
The value of your property in a Taking must be based on the "highest and best use" to which your property could be put. For example, if your property is being used as farmland but would have a higher value as a residential subdivision, then the value of your property as a residential subdivision should be used in determining the amount of just compensation due to you. In order to make this determination, it often is necessary to have engineers, land planners, environmental consultants, and other experts examine the property. This issue is frequently a major point of contention between the condemning agency and the property owner.
Most Takings will involve the acquisition of only a portion of your property. When that occurs, your just compensation typically is measured by comparing the fair market value of your entire property just before the Taking with the fair market value of the portion of your property retained by you just after the Taking. The difference between those two values can be considered to be the just compensation due to you. For example, if your property fronts on a public road and the DOT takes only a portion of the property for a highway widening project, you would be entitled to recover the difference between the value of the entire property just before the Taking and the value of your remaining parcel just after the Taking.
Since your remaining parcel still will enjoy highway frontage, its value after the Taking may not be a great deal less than its value before the Taking, even though your parcel is smaller in overall size. Again, how these partial Takings affect the value of a property can be a major point of contention in a Taking case.
The Tax Implications to the Property Owner of a Taking
One positive aspect of a Taking is how the IRS will treat the payment made to you by the condemning agency. Generally, gain or loss realized from the sale or other disposition of property must be recognized by you in the year in which the sale or disposition occurs. However, Section 1033 of the Internal Revenue Code provides an exception by allowing you to defer the recognition of gain in connection with a Taking. To take advantage of the exception, you must purchase "like kind" replacement property within two years (or three years for certain real property held for use in a trade or investment). It is important to note that you are not necessarily limited to the price offered to you by the condemning agency.
Once the threat or imminence of a Taking exists, you can sell your property to another private party and still defer the gain from the sale, provided the other requirements of Section 1033 are met.
Taking cases, especially those involving commercial property, can be complicated and challenging. With good guidance and advice, the great majority of these cases can be resolved amicably and to the satisfaction of all parties after the valuation issues are explored. For those cases that cannot be resolved, it is essential for the parties to have competent legal counsel with jury trial experience to represent them in court on the issue of just compensation.
© 2009, Ward and Smith, P.A.
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors, including estate planning. Ryal W. Tayloe practices in the firm’s Litigation Practice Group where he focuses primarily on real estate disputes, construction disputes, and general litigation. Comments or questions may be sent to email@example.com.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.