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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11813
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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A neighbor had an ingress/egress easement on our property

Customer Question

A neighbor had an ingress/egress easement on our property which would have allowed him among other things to build a road on our land -- which he threatened to do. So we purchased the easement from him -- i.e., paid to have the easement terminated, so that we can plant trees in that area -- we are reforesting our land. Can I amortize the easement purchase, as an intangible asset (on our federal tax return), since I bought the right to use that land in an income-producing manner, which use I could not have made of it otherwise? Or does the easement termination simply add to the basis of our land (and can not be amortized)?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

...

I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Stetson School of Business and Economics, as well as CFP and CRPS designations.

I can help here

...

So sorry, but

I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Stetson School of Business and Economics, as well as CFP and CRPS designations.

I can help here

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The payment for the release of a restrictive covenant is considered a capital gain to the recipient if the property was held for investment.... and is capital investment for you.

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The question then becomes ... Is land depreciable for any reason?

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As you'll see from this IRS FAQ on depreciation ... (https://www.irs.gov/pub/irs-regs/depreciation_faqs_v2.pdf)

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"[3] Can I depreciate the cost of land?

Land can never be depreciated."

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So sorry, but the tax policy/logic here is that land doesn't get used up ... Just as with depreciation of rental property, only the improvements to land (e.g., buildings) are depreciated

Expert:  Lane replied 1 year ago.

Sorry for the repeat of the header there... The system's been "glitchy" today.

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But to recap, sorry no, the price CAN be added to your basis (your intuition was good) and the benefit will, of course, be the deferred gratification of a lower gain if and when sold someday.

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I think there may be a limited allowance for this if the land qualifieds under 194(a) or (b)

Expert:  Lane replied 1 year ago.

(A) In general

In the case of any qualified timber property with respect to which the taxpayer has made (in accordance with regulations prescribed by the Secretary) an election under this subsection, the taxpayer shall treat reforestation expenditures which are paid or incurred during the taxable year with respect to such property as an expense which is not chargeable to capital account. The reforestation expenditures so treated shall be allowed as a deduction.

(B) Dollar limitationThe aggregate amount of reforestation expenditures which may be taken into account under subparagraph (A) with respect to each qualified timber property for any taxable year shall not exceed—(i)

except as provided in clause (ii) or (iii), $10,000,

(ii)

in the case of a separate return by a married individual (as defined in section 7703), $5,000, and

(iii)

in the case of a trust, zero.

Expert:  Lane replied 1 year ago.

Now, as you likely know,you can use Form T to

  • Claim a deduction for depletion of timber,
  • Elect under section 631(a) to treat the cutting of timber as a sale or exchange, or
  • Make an outright sale of timber under section 631(b)

Expert:  Lane replied 1 year ago.

Back to Section 194, here's a readable explanation

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Up to $10,000 of qualified expenses for the establishment of commercial timber stands may qualify as a current deduction, and amounts over $10,000 may qualify for amortization over an 84-month period. The expensing limit applies to each Qualified Timber Property (QTP). These provisions come under Code Sec. 194.

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The term "qualified timber property" means a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products. (Code Sec. 194(c)(1)

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Commercial production means that the timber is being grown for the eventual sale to commercial timber processors or for use in your own trade or business. The site being reforested must be at least one acre in size. And as a result of the reforestation expenditures, the site must contain enough trees to be adequately stocked for the purposes of commercial timber production. Both owned and leased land qualifies.

Expert:  Lane replied 1 year ago.

So, to recap, generally no, it's added to basis

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but under section 194, if the land qualifies, up to 10,000 can be expensed in 1 year and the remainder amortized over 84 months

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And IRC Sec. 194(c)(1) provides the detail as to what qualifies - essentially over one acre being used this way, grown for sale, as a trade or business

Expert:  Lane replied 1 year ago.

And hopefully as a value added, here are the questions that would likely be asked upon audit for those electing this procedure:

  • How often do you sell timber?
  • How much property (acres) do you own? Where is it located?
  • Was the timber sold owned solely by you? If not who else shared ownership?
  • Do you have a contract for the sale? Provide a copy.
  • Did you receive Form(s) 1099? How many? If not, how do you determine gross receipts?
  • How did you receive payment? At the beginning, on a schedule or at the end of the deal?
  • Did the deal/contract cover more than one tax year? Did it cover more than one sale? Did it cover more than one payment?
  • If basis in the timber is claimed, how was that determined?
  • Was the sale negotiated or did it go through a bidding process?
  • Did you use a consulting forester or any other agent in selling the timber or did you deal directly with the buyer? If so, provide name and contact information.
  • Are you involved in any state programs that allow property tax relief for timber owners? If so, who administers this program and is there any particular individual with whom you deal?
  • When did you acquire the property and was a timber inventory done at that time?
  • Do you have a management plan for the timber property?
  • Do you have a conservation easement on the property? If so, who holds the easement?
Expert:  Lane replied 1 year ago.

I hope this has helped

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let me know if you have questions

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If this HAS helped, (and you don't have any other questions on this), I'd really appreciate a positive rating (using those stars on your screen) … That's the only way I'll be credited with a portion of what you've paid JustAnswer.com

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Thank you,

Lane

.

Expert:  Lane replied 1 year ago.

Sorry for the data-dump, but I wanted to cove all the bases,(not know what you're already doing and how this might be added TO that to help qualify under 194

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Hopefully this provides a foundation for further questions

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let me know if yo have any at all

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Lane

..

Expert:  Lane replied 1 year ago.

Hi,

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Just checking back in to see how things are going ... Did my answer help.

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Let me know,

Lane