Quitclaim Deed conveying 3.65 acres of irrigation to District

[taxjungle]

Client received a Quitclaim Deed conveying 3.65 acres to his Water District. The letter of instructions says that: By signing the Quitclaim Deed the taxpayer acknowledges the lands where the water rights are being removed must be dried up from the date of the Quitclaim Deed..... .

The checkstub says: Purchase 3.65 PBC Water Rights. $2885.

What do I do with this? Does it only reduce his basis in his property or does he have a sale to report?

Thank you for your help.

[JG EA]

Client received a Quitclaim Deed conveying 3.65 acres to his Water District. The letter of instructions says that: By signing the Quitclaim Deed the taxpayer acknowledges the lands where the water rights are being removed must be dried up from the date of the Quitclaim Deed..... .

The checkstub says: Purchase 3.65 PBC Water Rights. $2885.

What do I do with this? Does it only reduce his basis in his property or does he have a sale to report?

Thank you for your help.

I don't know why signing a quitclaim deed and receiving money would be any different than a granting of an easement. Pub 17 says this about easements.:

Easements. 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.

...

[taxjungle]

Quitclaim Deed

JD EA,

Thank you for your response. I doubt that my 80 year old client even knows what his Basis is since it involves many acres that he has held many years.

Can anyone tell me if it would be OK just to keep a record of this sale and reduce his Basis in his property by the sales amount? ...

He probably didn't pay much for that portion of the property when he bought it since it was purchased so many years ago.

Thanks again!

[Burke]

I agree with JG EA. Reduce basis.

[JG EA]

If you can determine the basis of that particular portion then there may be some taxable income. But if not subtract it from the total basis. Try to find out the total basis now in case it is less than the money received - in which case there would be some taxable gain now.

I would say this is like stock basis. If there is really no way to figure basis then this amount would be taxable.
Or you could ask the client - Did it cost at least $(Amt of the easement)?