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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4099
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I received land damage payments from an oil company and gas

Customer Question

I received land damage payments from an oil company and gas pipeline, that took a large chuck of our property, and want declare these damage payments as a reduction in the cost basis of our land instead of income.
JA: The Accountant will know how to help. Anything else I can tell the Accountant before I connect you two?
Customer: not that I can think of
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Submitted: 7 months ago.
Category: Tax
Expert:  PDtax replied 7 months ago.
Hi from Just Answer. I'mCustomer I can assist. Was this from an insurance claim, or did you actually lose the land to an eminent domain or easement claim?
Customer: replied 7 months ago.
Eminent domain, and threat of condemation, for the pipeline; for the oil well other people own the mineral rights for our land, we only have surface rights. The oil well destroyed our property's value.
Expert:  PDtax replied 7 months ago.
Damages can be used to reduce your basis in the land (but not below zero). Permanent easements get similar reduction treatment. "Rev. Rul. 68 291, 1968-1 C.B. 351, clarifying, Rev. Rul. 59-121, 1959-1 C.B.212, provides generally that the consideration received for the granting of an easement constitutes the proceeds from the sale of an interest in real property and should be applied as a reduction of the cost or other basis of the portion of the land subject to the easement.See also , Rev. Rul. 54 -575, 19542 C.B. 145" You likely received a 1099-S reporting the proceeds. Your agreement will specify an allocation of the payment amount, likely in box 3 of the form. If you have sufficient basis in the land to absorb the payment, simply reduce the basis by the payment. Any excess received over your basis should be taxable as capital gain. Thanks for asking your question at Just Answer. Positive feedback is appreciated. I'mCustomer
Customer: replied 7 months ago.
Thank you for being there at this point in time. However, I already know what you are telling me.. What I wanted to know is how (on what forms) to report these payments (1099-MISC) to the IRS.
Expert:  PDtax replied 7 months ago.
Report them as sale proceeds, with a corresponding equal cost basis. Example: $40,000 1099-MISC proceeds: Sale of land interest $40,000Cost basis $40,000Gain on sale $0