How to report this 1099-S proceeds

[taxdan]

City bought part of taxpayers front yard of principal residence to widen road. Taxpayer received 1099-S for proceeds. Do I just calculate gain/loss by using the taxpayers prorated cost basis of the land only and put sale on Sch D? I would report any gain, but not take any loss, correct? Since they are not selling their home, and do not plan to for awhile, does the homeowner exclusion of gain not apply to this?

Thanks so much!

Dan

[jainen]

>>City bought part of taxpayers front yard<<

I think you get your choice of several nice options. Yes, they can take the 121 exclusion--if they sell the rest of the home within two years. Or they could treat it as an involuntary conversion under threat of eminent domain, and roll the basis into new property. Or just recognize any gain this year if they are in a low tax bracket. And the basis itself has some options. Should you allocate the whole basis equally by square footage, or was the roadside more or less valuable at the time of purchase? I think they might even be able to pocket the cash as a return of principal and simply reduce the basis of the home by the same amount.