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A pipeline company paid my mother $3,000 ROW in 2013. Additionally, she was paid $4

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A pipeline company paid my...
A pipeline company paid my mother $3,000 for a ROW in 2013. Additionally, she was paid $42,500 for damages to fences, trees and surface damage. She has owned the property since around 1970. The cost basis was about $650 an acre back then. Today this property would be worth $30,000 to $40,000 an acre because of its location. The tax preparer for my mother did not show the $42,500 on her return as income, nor did she detail any damages. The IRS received the 1099 from the pipeline company and has recalculated her taxable income and has hit her with a bill for over $11,000. I know she has lost the ability to sell the land for residential development. It has been ag exempt, but we had actually considered building some four-plexes on that section of the property, but now have lost approximately 2.5 acres due to the ROW. How can we go about showing the loss of value in the land and or other damages in order to avoid the tax liability? She spent over $9,400 having a fence moved in or
Submitted: 2 years ago.Category: Tax
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6/30/2015
Tax Professional: Lev, Tax Advisor replied 2 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,164
Experience: Taxes, Immigration, Labor Relations
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A compensation for the right-of-way (ROW) is classified as an easement. Compensation for damages is treated separately.Regarding determination of taxable income...The compensation for the granting an easement is treated as the sale of an interest in real property.Please verify that is reported on form 1099S - and not on form 1099MISC.Please see IRS publication 17 -http://www.irs.gov/pub/irs-pdf/p17.pdfEasements. The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain.So - we need to allocate the basis to that portion and report that as a sale.The gain will be treated as capital gain - long or short term depending how long you owned the property.
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Customer reply replied 2 years ago
And what about the $42,500 portion that was supposed to be damages?
Tax Professional: Lev, Tax Advisor replied 2 years ago
That would be ordinary income - but we may deduct actual expenses to repair damages.
Amounts paid for expected damages, but where no damage was done, do not qualify for treatment as return of capital. It was held in Gilbertz v. United States, 808 F.2d1374 (10th Cir. 1987), rev'g 574 F. Supp. 177 (D Wyo. 1984), that payments for anticipated damages are ordinary income and not return of capital.
See here - page 65 - http://www.irs.gov/pub/irs-mssp/oilgas.pdf
Compensation for damages is reported on form 1099MISC box 3 - please verify because some payers are mistakenly report in box 7.
Let me know if you need any help.
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Customer reply replied 2 years ago
Is the loss of 100 year old trees considered damages? They pushed several into a pile, dug a huge hole and buried them on our property. I have no photos or videos of this. What do we do? Does my mother have to show compensation received for the loss of these trees as income, in addition to the loss of developmental use of the land itself?
Tax Professional: Lev, Tax Advisor replied 2 years ago
Yes - the loss of trees is damages. So compensation for such damages would be taxable income unless spent to repair damages. Your mother will need to report total amount she was paid for damages and may deduct whatever she actually spent to repair damages.
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