Sale or reduction of basis

[louiscatoni]

Individual owns land. Sold the rights to develope land to town. Individual has title but can't develope property. Question: Are the proceeds from the sales of rights a sale or reduction of basis?

[Nashville]

Little Rhody

Louis welcome to our forum. You have a good question.

And I'll admit I don't have a good answer. Maybe someone will post a knowledgeable answer -- there are lots of folks on our forum more knowledgeable than myself, although sometimes I act like I know everything...

You might research how allocations are made under such topics as mineral rights, drilling rights, easements, etc. in cases where land rights are involved separate from the title to the land itself. In your situation, you might also consider whether the developer or landowner is going to retain rental rights. If the landowner is going to receive no further economic consideration down the road, you've got to wonder why he wouldn't just sell the land to begin with.

[dsi]

Louis, what are the terms of the "sale of rights"? Is this the same as a lease?

[Burke]

The income is a capital gain, LT or ST depending on how long the owner has owned the land. (If the right or easement is sold, and never reverts back to the land owner, then such an agreement could be a "sale" of a capital asset reported on Schedule D.) For this to occur, the contract must be worded properly. The right must be perpetual and can never revert back to the grantor-taxpayer.