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The right of government (both state and federal), public corporations (school districts, sanitation districts), public utilities, and public service corporations (railroads, power companies) to take private property for a necessary public use, with just compensation paid to the owner. Generally, however, the law will not allow compensation for lost profits, inconvenience, loss of goodwill, and the like, although severance damages may be awarded for a loss in value to the remaining property that is not actually condemned. Through eminent domain, the state may acquire land (fee, leasehold, or easement) for streets, parks, public buildings, public rights-of-way, and similar uses. No private property is exempt from this exercise of government power.

If the owner and the government cannot negotiate a satisfactory voluntary acquisition of the property, the government can initiate a condemnation action to take the property. In such case, an owner’s main grounds for complaint would usually be that the intended use is not a sufficient public use or that the valuation given the property in the condemnation proceeding is unjust. Generally speaking, the courts will not permit a taking in fee if an easement will do; an entire piece cannot be taken if only a part is needed.

Whether a taking is for a public purpose is broadly construed. For example, a public purpose clearly exists in condemnation for urban renewal purposes; that is, the government can condemn a blighted area and then sell it to a private developer for private purposes. This is reaffirmed in the 2005 Supreme Court decision Kelo v. City of New London. However, the court added that states are free to ban the taking of property for such projects.

Eminent domain is an outright acquisition of property with payment of compensation. It is not an uncompensated regulation of the use of property (as in the case of restrictive zoning).

Upon the vesting of title in the government, all preexisting liens and encumbrances are extinguished; anyone affected by this change, such as mortgagees, must look to the award of condemnation money for satisfaction of their claims.

Generally, when an owner’s property is taken by eminent domain, recognition of gain realized from the condemnation money can be deferred under IRS 1033. Depending on the property, the qualified replacement property must be identified and/or purchased within two to three years from the end of the year in which the taxable gain is realized. In most cases, for the replacement property to qualify, it must be similar or related in use (“like-kind” property).

A lessee is usually given the right to cancel his or her lease when a large portion of the leased premises is taken. Long-term leases usually provide for a condemnation award to be apportioned between lessor and lessee, according to the value of the parties’ respective estates.
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.

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