Reporting easement payment on residential rental property

[FEDUKE404]

A client owns a single-family residence which has been rented for >20 years.
Last year the local government paid ~$3k as an easement in order to install sidewalks. The client states it is NOT a recurring payment. The easement is ~1,200 square feet in size.

Am I correct in assuming this is NOT a taxable event for 2024, and that for any future disposition the existing (2003) cost basis for the land is lowered by the easement payment received in 2024?
(So far as I know, no "tax documents" will be issued by the local government attorneys.)

Thanks in advance!

FE

[spanel]

Easement money would be reported on form 1099s. You would need to come up with a cost basis on the 1200 sq ft.

Chris

[FEDUKE404]

Easement money would be reported on form 1099s. You would need to come up with a cost basis on the 1200 sq ft.

Chris

That was my first thought, but further review seems to indicate that since no portion of the lot was actually "sold," then it is a cost basis adjustment to the price of the land (amount established previously) and not a taxable 2024 event.
As I mentioned above, there is no Form 1099-S or whatever anticipated. The property owner is somewhat clueless.

At least I have a few months to figure things out and to hopefully clear up my confusion.

Thanks for the input!

FE

[TaxGuyBill]

Here is the link for the section in Publication 544 about easements:

https://www.irs.gov/publications/p544#en_US_2022_publink100072262

[FEDUKE404]

Here is the link for the section in Publication 544 about easements:

https://www.irs.gov/publications/p544#en_US_2022_publink100072262

Well, OK. I had already done a bunch of research prior to posting anything here. I had reached no definitive answer and then thought perhaps someone on this board had encountered a similar situation with rental property.

I don't really need to read through a 60+ page IRS publication. . . I can easily do a routine Google search for such information.

FWIW, the owner of the rental property owns thee SAME amount of acreage as prior to the easement events. It is debatable whether anything tangible was "sold." The only difference is the local government paid him some money and has since added a public sidewalk along the street.

I do NOT expect any Form 1099-S to be issued. All of the information and related payment matters were handled by the city attorney.

[spanel]

Since its an easement, I would put the entire thing as sale of property long term $3000 gain.

Chris

[TaxGuyBill]

I don't really need to read through a 60+ page IRS publication.

Did you even click the link? It brings you directly to the subheading for an easement.

[FEDUKE404]

Did you even click the link? It brings you directly to the subheading for an easement.

I did.

OK, let's play devil's advocate. . .

Assume "NONE" of the property was actually sold. (That is a fact!)

But, if you go the "sold" route, what exactly was sold? And what was its cost basis? Only a right to access? Client still owns the same acreage as before the easement payment.

There seem to be two camps on this matter: #1 - there is some kind a sale and report the proceeds on a 4797 or #2 - there is no 2024 taxable event and the historical cost basis of the land is reduced by the 2024 easement payment.

I will keep researching.

FE

[spanel]

That is from the above link....

Easement.


The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

[terryats]

Taxguybill gave you the link to the subject at hand he did not suggest you read the entire pub. I suppose you could google it, but I prefer to research IRS, and not some random expert on the internet. If you had bothered to look at the link, this is what it says.

Easement.


The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation.

[FEDUKE404]

Taxguybill gave you the link to the subject at hand he did not suggest you read the entire pub. I suppose you could google it, but I prefer to research IRS, and not some random expert on the internet. If you had bothered to look at the link, this is what it says.

Easement.


The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation.

O...K...re "If you had bothered to look at the link, this is what it says. . ."

As an update: Since my posts above, the client has informs me that the property acreage HAS slightly decreased, so apparently there was a "sale."

The client also has recently received both a Form 1099-S and a Form 1099-MISC (rent) from the local municipality. The single check received for the Oct 2024 easement activity is the total of those two amounts. The client states he has no awareness of where the "rental income" came from, and does NOT anticipate any similar 2025 rental income. The single-family home has been rented throughout the entire sequence of events, and continues to be rented.

Lots of confusion / unknowns here. I'm just the dumb tax person so I will enter the two 2024 transactions as required and move on.

Here's hoping everyone has a PLEASANT day!!

FE