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The general rule concerning the treatment of easements may be found in Treasury Regulation Section 1.61-6 (a) which states :
"When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts. The realized gain or sustained loss on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to each part. The sale of each part is treated as a separate transaction, and the gain or loss shall be computed separately on each part. Therefore, gain or loss shall be determined at the time of sale of each part and not deferred until the disposal of the entire property has been disposed of."
If title to the land is retained, the payment for a permanent easement is applied against the basis of the land affected by the easement. If the payment exceeds the basis in the property, a taxable gain will be realized.
Example, Farmer grants an easement that involves 2 acres of a 40-acre tract to an electrical utility company for $8,000. Farmer purchased the entire 40-acre tract for $4,000 in 1952. Since only 2 acres of the tract were involved, the sale of the easement would essentially be the sale of the 2 acre tract. So, his basis for the purpose of calculating gain would be $ 200 ($4000 purchase price divided by the 40 acres in the tract times the 2 acres affected by the easement). Farmer would recognize a $ 7,800 taxable gain to be reported in Part I, Form 4797 .
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