Other Income

[BillV]

My client had an oil pipeline cross his property who obtained a 50 foot easement for such installation. Client was paid a sum of money one time fee. Payer told him he could claim half for damages. It seems to me that he has a permanent detriment to his property and the payment received is in no way taxable income. Your thoughts!

[Burke]

You need to know the terms of the easement. If it is permanent, and never reverts back to the property owner, it is the sale of a capital asset and goes on Sche D. Pro-rate cost basis in the property based on the acreage granted. If the seller retained title to the section for which an easement is granted, then the amt received reduces basis in the entire property. Also, if the easement is temporary, a deduction for amortization may be claimed by the purchaser. I have no idea what they meant by "claiming half for damages."

[taxea]

I agree with Burke. This is a sale or long term lease to the easement. Look at the contract. Either way this is income.

[ChEAr$]

My client had an oil pipeline cross his property who obtained a 50 foot easement for such installation. Client was paid a sum of money one time fee. Payer told him he could claim half for damages. It seems to me that he has a permanent detriment to his property and the payment received is in no way taxable income. Your thoughts!

As JohnH would advise listen first to your hair dresser before you listen to the payer in this case.

[Jesse]

You need to know the terms of the easement. If it is permanent, and never reverts back to the property owner, it is the sale of a capital asset and goes on Sche D. Pro-rate cost basis in the property based on the acreage granted. If the seller retained title to the section for which an easement is granted, then the amt received reduces basis in the entire property. Also, if the easement is temporary, a deduction for amortization may be claimed by the purchaser. I have no idea what they meant by "claiming half for damages."

I agree w/Burke, you need to know the terms, but I don't read Burke's post as stating it is income, but rather that it may or may not be income -

- If it is permanent, and never reverts back to the property owner, it is the sale of a capital asset and goes on Sche D.

- If the seller retained title to the section for which an easement is granted, then the amt received reduces basis in the entire property.

[Burke]

Absolutely correct. And after re-reading OP, I am guessing they told him to only claim 1/2 of proceeds due to loss of FMV in the property. Wrong.

[KathMorgan]

Professionals!

I agree with Burke on the OP's question and on the hairdresser comment. In my office when someone says "they" told him he could do this or that on his taxes, I ask my client if he takes medical advice from his auto mechanic? lol

[Jiggers]

Easements are capital gains in excess of basis. On Schedule D. Possibly 4797 part 1, if farm land. In any case it is capital gains.

Damages! I wonder who "educated" these oil men that damages are not taxable. I have had my share of clients last year and this year with assurances from the oil men that these seismic damages are not taxable.

IRS Oil & Gas Audit Guide is specific about these being taxable.

In almost all cases, the damages is for crops or pasture grazing grasses. Where are the expenses for these crops and pasture grazing grasses reported, I ask my clients. They respond on Schedule F, of course.

So I tell them that the income for these "damages" are also reported on Schedule F because if they sold their crops or cut hay and sold it, that is where the income is for.

They understand that.

[Burke]

Aha! I am enlightened. Perhaps what they were saying was to take 1/2 for damages (as you said would flow as income to Sche F) and the other half as sale of an easement? Perhaps TP should get an official document from the oil & gas boys which spells this out......

[JohnH]

And be sure the hairstylist approves the final draft after the oil & gas guys write it up Then you're ready to prepare the return.