1099 Land Degradation

[belle22]

Client received a $40,000(box 3) 1099 from BP. It was to widen a one lane dirt road so wind mill propellers could pass by. The BP representative told the client's land owner association that they could deduct part of the amount because it is land degradtion. First, does that sound correct and second,how much would be deductible? 400' of road front - widening 25'. Thanks for any ideas.

[Koss]

Form 1099

Is your client an individual, or some sort of homeowner's association or something?

That may make a big difference in how that payment is treated.

My knee-jerk reaction is that maybe none of the payment is taxable. It reduces the taxpayer's basis in the land.

How you report it, to avoid getting an IRS notice, is a separate question.

But I can't reach a conclusion on how much, if any, of the amount is taxable without more information about the land and the owner.

Was it residential? Farmland? Common area of a condominium property?

Did the taxpayer actually sell a small piece of land so that that piece of land could become part of the road? Or did they merely give up an easement, and lose some landscaping during the widening of the road?

Did they actually pocket the money, or was it applied to the outstanding balance of a mortgage? That probably doesn't have an impact on the taxation, but it's an interesting factoid...

BMK

[belle22]

1099 Degradation

The client is an individual, the land is recreational (hunting camp),he pocketed the money, and no land was sold. BP's check stub read FMPA access agreement payment-lot 33.

[Koss]

Easement

That's an easement.

It reduces the basis in the land. If the payment exceeds the basis, then the excess is taxable as a capital gain. It's treated as a sale of an interest in the real property.

Here's a link to a discussion about payments for easements that was written by an Ohio attorney who specializes in tax and real estate matters. The paper is about five years old, but this stuff hasn't changed.

This link works, but it takes a little time. It's actually an MS word file.

http://tinyurl.com/7ofv456

BMK

[belle22]

1099 degradation

Thanks for the info.

[Koss]

Reporting

You still have to decide how to report it. Assuming the payment does not exceed the basis, he has no taxable income.

I think the payers routinely mangle the reporting of these transactions. I don't think it belongs on a 1099-MISC. The payer paid for an interest in real estate. If they're going to issue a form, it should be a 1099-S. But that's not a battle worth fighting.

One way would be to put it on Schedule D, and make the basis equal to the amount reported on Form 1099-MISC, so there is no gain or loss.

It may still generate an IRS inquiry, because 1099-MISC Box 3 doesn't normally go to Schedule D. The IRS may be looking for an entry on Form 1040, Line 21.

Good luck.

BMK