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A pipeline company paid me for a permanent right of way and

Customer Question
for damages to my property...
A pipeline company paid me for a permanent right of way and for damages to my property. On the 1099 Misc the ROW was reported as rent and the damages were reported as other income. Also I received payment in lieu of free gas. This was listed as nonemployee compensation on the 1099 Misc How and where are these payments reported on my tax return?
Submitted: 5 years ago.Category: Tax
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Answered in 27 minutes by:
3/20/2012
Tax Professional: Lev, Tax Advisor replied 5 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,331
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!

1.

A rental income is reported on schedule E - www.irs.gov/pub/irs-pdf/f1040se.pdf

You will report your rental income and rental expenses and your net rental income will be transferred to form 1040 and added to other taxable income.

2.

However - a permanent right of way should be treated as an easement. It should not be reported as a rent. You might want to contact the payer and ask for correction.

The sale of easement is treated as the sale of partial rights related to the ownership.

Your proceeds for the sale of easement will be reported to the IRS as income. You do need to report it.

Your taxable gain = (selling price) - (basis). You need to allocate the basis to the easement.

If you have owned the property for more than one year, the gain is treated as a long-term capital gain - taxed at reduced rate - not more than 15%.

3.

The sale transaction is reported on form 8949 - Part II - http://www.irs.gov/pub/irs-dft/f8949--dft.pdf - if the property was held more than a year - box "C" in the header should be checked.
Then - amounts will be transfered to schedule D - http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Part II, line 10 - and you should have the taxable gain in column (h).

4.

Compensation for damages to your property are correctly reported in box 3. That amount is not taxable but the basis of the property should be reduced by that amount. If the basis is zero - the compensation will be treated as a capital gain.

Because that amount is reported to the IRS - you may not simply ignore it - to avoid IRS letters - you might want to attach a note to your tax return with explanations.

5.

A payment in lieu of free gas seems as incorrectly reported in box 7 - I would expect that amount to be reported in box 3. Whatever is reported in box 7 is treated as a payment for services that you provided - and the IRS generally expects that amount to be reported on schedule C and it would be subject of both - income and self-employment taxes.

Since you did not provided any services - I suggest to contact the payer ans ask for corrections.

 

Let me know if you need any help.

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Customer reply replied 5 years ago
So if I paid 80,000 for the property and got 18,000 for the right of way my basis is reduced to 62,000? And if they paid me 100,000 for damages??
Tax Professional: Lev, Tax Advisor replied 5 years ago

1.

If you paid $80,000 for the property - that is your basis.

Just consider an example below for illustrations.

2.

If you sell easement - the basis should be allocated to easement and other property rights. For instance - if the right of way value is 10% - the basis allocated to easement is $80,000*10%=$8000

You gain from the sale of easement is $18,000(selling price) - $8,000(allocated basis) = $10,000.

3.

The basis of the remaining part is $80,000(original basis) - $8000(basis allocated to easement) - $72,000.

When you receive $100,000 for damages - that reduced your basis to zero - and remaining $28,000 are taxed as capital gain.

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Customer reply replied 5 years ago
The same pipeline company has approached me to sell them a large portion of my property. Lets say the price is over one million dollars. How would this work as far as reporting on a tax return.
Also if I sell the property how do I figure out what to send the IRS.
By the way the figures I have used are just for questions sake.
Tax Professional: Lev, Tax Advisor replied 5 years ago

The same pipeline company has approached me to sell them a large portion of my property. Lets say the price is over one million dollars. How would this work as far as reporting on a tax return.

The sale transaction is reported on form 8949 - Part II - http://www.irs.gov/pub/irs-dft/f8949--dft.pdf - if the property was held more than a year - box "C" in the header should be checked.
Then - amounts will be transfered to schedule D - http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Part II, line 10 - and you should have the taxable gain in column (h).

 

Also if I sell the property how do I figure out what to send the IRS.

If you held the property more than a year - the gain will be taxed at reduced long term capital gain rate - 15%.

West Virginia state taxes will be an additional - up to 6.5%

If you have large long term capital gain - you might be subject of Alternative Minimum Tax (AMT), - but that largely is based on your other circumstances. You may use AMT assistant provided by the IRS to estimate the AMT - http://apps.irs.gov/app/amt2011/index.jsp?ck

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Customer reply replied 5 years ago
After my basis is reduced by the easements {there are actually two on the property now} I am going to have to pay taxes on most if not all of the sell price?
Tax Professional: Lev, Tax Advisor replied 5 years ago

Yes - after the basis is reduced to zero - all compensation directly related to your property is treated as a capital gain.

For each easements the basis should be allocated.

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Customer reply replied 5 years ago
You have helped me immensely! I really appreciate the plain English answers! I am hoping another question concerning this subject does not arise while I fill out my tax forms. I took last years to a pro and now my return is in IRS review. I have looked at my 2010 return and now understand why its in review. So not happy!!!
Your information is going to help me ensure my taxes are done right this year!!!
THANK YOU SO MUCH!!!!
Tax Professional: Lev, Tax Advisor replied 5 years ago

The pain issue that some income items seem not reported correctly.

You might want to contact the payer and politely ask for corrections.

The IRS has some perceptions based on how income is reported.

 

Please be sure to accept the answer. Experts are credited only if answers are accepted. Please bookmark this page - so you may come back for references.

Lev
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