1099-S - easement on residence

[Bill Tubbs]

Client received $6000 for a power-line easement running across their land. They have 10 acres of land which includes their house and several acres for their animals/pets. They have owned the property 2 1/2 years. Does Sec 121 apply (they meet the 2-year tests)?

Any input is welcome.
Bill

[veritas]

If they sell

their entire property.

[OldJack]

It can reduce all or a portion of the basis of the property. Determine the cost basis of that portion of land and then apply the sale price to determine gain or loss.

Cost basis allocated to the easement land does not have to be allocated on equal square footage of total land if the fair market value of the easement land is more than the FMV of other portion of land owned.

Hint: The easement sale price being FMV may be or close to the cost basis allocated to the land, since it is probably more valuable than the remaining land.

[Bill Tubbs]

basis

It can reduce all or a portion of the basis of the property. Determine the cost basis of that portion of land and then apply the sale price to determine gain or loss.

Cost basis allocated to the easement land does not have to be allocated on equal square footage of total land if the fair market value of the easement land is more than the FMV of other portion of land owned.

Hint: The easement sale price being FMV may be or close to the cost basis allocated to the land, since it is probably more valuable than the remaining land.

When clients purchased their house 3 years ago, they were looking originally at 5 acres + house; but they had an option to purchase another 10 acres at $5000 -- $500/acre. I don't know off-hand what the value of the house and first 5 acres is -- probably $150,000 or so. The easement (1099-S) was $6400 for 0.5 acre.

So, you're saying that if the house and all 10 acres is $155,000 that I can use $6400 for the basis of the easement??

Bill

[OldJack]

No... I have no idea what is the cost basis of the land. I would expect that when allocating cost basis, certain portions of land (maybe road frontage) would be worth more than other portions and if you had bought just that more valuable land it would have cost you more.

Also there is the aspect that the easement may have decreased other portions of the land thereby reducing the cost basis of that portion and increasing the easement portion cost.

[jainen]

just a basis reduction

>>certain portions of land (maybe road frontage) would be worth more than other portions<<

That might be true enough, but it is completely irrelevant. The taxpayer didn't sell ANY land, valuable or not. He only sold a limited right of access for a certain purpose. This is just a basis reduction.

[S T]

From Pub 551

Page 5, Easement

the amount you receive for granting an easement is generally considered to be a 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

Sandy

[OldJack]

>>certain portions of land (maybe road frontage) would be worth more than other portions<<

That might be true enough, but it is completely irrelevant. The taxpayer didn't sell ANY land, valuable or not. He only sold a limited right of access for a certain purpose. This is just a basis reduction.

True, but the easement has decreased the value of at least that portion of the overall land and maybe the entire property. That is why basis is reduced for later sale. Would you prefer to buy land with or without an easement?

When you buy 10 acres at an average cost of $500 per acre that does not mean that the unusable and unaccessible acre of the land has to have $500 assigned as its cost basis. Cost can be assigned based upon a percentage of the physical value of the land. ie: more cost can be assigned to frontage land (where the easement is) than the gully in the back of the property.

As Sandy points out the sale of an easement can and will sometimes produce a taxable gain. Therefore it is important that the proper cost is assigned to the easement land so that basis can be reduced and not result in a taxable gain.