The State Took His Land at 63 and Wrote Him a Check. Social Security Looked Away. The IRS Did Not.

Eminent domain awards don't count as earned income, so Social Security won't withhold benefits regardless of the check's size.

The IRS taxes only the gain above the property's adjusted basis, and recognized gain can make up to 85% of Social Security benefits taxable.

A condemnation gain recognized at 63 can raise Medicare Part B and Part D premiums at 65, since Medicare uses income from two years prior.

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A Letter From the State, and a Knot in the Stomach

Picture a 63-year-old man who has already claimed Social Security. He owns a parcel of land, perhaps inherited or bought decades ago. Then a certified letter arrives: the state is taking the property through eminent domain for a public infrastructure project, and it will pay him six figures for the land.

His first fear is that the check will collide with the Social Security earnings test and swallow months of benefits. That fear is misplaced. The earnings test does not care about the award. The IRS cares very much about the gain hiding inside it.

Because he claimed before full retirement age (FRA), the earnings test applies to him. In 2026, Social Security withholds $1 in benefits for every $2 earned above $24,480 for someone below that milestone throughout the year. But only wages and net earnings from self-employment count. Social Security excludes investment income, interest, pensions, annuities and capital gains from the test.

A condemnation award for land is treated as proceeds from an involuntary sale, not pay for work. Even a six-figure check will not cause benefit withholding merely because it is large. Social Security looks past the size of the deposit and asks where it came from. This one did not come from a job.

The IRS Looks for Gain, Not the Size of the Award

The award itself is not necessarily taxable in full. The IRS compares the net condemnation proceeds with the property's adjusted tax basis. If the proceeds exceed that basis, the owner has a gain. That distinction can produce very different results. Land bought cheaply decades ago may carry a low basis and a large gain. Inherited land generally receives a basis tied to its value at the previous owner's death, potentially leaving a much smaller taxable spread.

Any recognized gain can increase the income used to determine how much of his Social Security is taxable. For a single filer, combined income above $25,000 can make part of the benefit taxable. Above $34,000, as much as 85% can enter taxable income. That does not mean the IRS takes 85% of his Social Security. It means up to 85% becomes taxable at his applicable rate.