payment from developer

[Kram BergGold]

A developer is building a house next to my client's home. This house will block the sunlight to my client's solar panels. The developer has offered to give my client $10,000 to put new panels up that won't be blocked. My take on this is, the $10,000 is taxable on line 21 and then my client claims whatever tax credit there is for new solar. Does anyone think it is not taxable?

[JG EA]

I am not so sure. If it was an insurance co it wouldn't be taxable. But, it is not. Couldn't it possibly be viewed as a gift? After all their present panels are now useless because of the new building. So, this is just a replacement of the things the new building took from them. I'm not sure just thinking out loud. Otherwise they would be taxed on replacement property and the money they originally spent was taxed also.

[BOB W]

Could it be a "Basis Adjustment"? Do the current panels just need to be moved to another location? You seem to say they need to be replaced in total?(new energy credit). This is an infringment on "air space" which is covered in legal law.

In other words, I have no clue.

Although if it was a casualty loss (sudden), I would follow those same casualty loss rules in thinking this through. Of course it isn't a casualty loss but it is a loss that the homeowner incurred. The money is to make whole of the loss.

I'm inclined to think the actual cost to fix the problem would be subtracted from the settlement and any excess would be line 21 income or basis adjustment. There is a possibility that the homeowner may receive a 1099 from the builder, what then???

[Bees Knees]

Could it be a "Basis Adjustment"? Do the current panels just need to be moved to another location? You seem to say they need to be replaced in total?(new energy credit). This is an infringment on "air space" which is covered in legal law.

That would be true If it were a payment for the granting of an easement. A payment received for an easement reduces basis in the property by the amount received. See IRS Pub 544, page 2, lower third column.

An easement is where someone pays you for some right of way through your property without you having to sell the property. Such as a utility company putting power lines through your property.

You would have to argue the builder is paying for your sun light right of way. Air space is usually up and down. If the sun were directly overhead, the neighbor's house could never infringe on your sun rights.

Maybe if you were a sun worshiper, you could claim sun rights belong to everyone. Nobody has the right to infringe on the sun light of any other property owner, without compensation. Then any payment due to sun light infringement would be considered an easement.

[Kram BergGold]

Moving the panels

My guess is the panels are old and not worth moving. So they will be replaced with new panels on the other side of the house. I don't see this as an easement as the developer is not getting anything for the money other than good will in keeping a neighbor happy in a area where neighbors can cause a lot of problems with City Boards. My client is the type who wants to do things correctly. So I am trying to tell it like it is to get some helpful input.

[BOB W]

If you want to play it super safe, follow your first post and include on line 21 and take the credit. I would review the credit rules for taking it twice on the same item (old panels in prior years and now new panels). Don't remember any restrictions, but check anyway.

Maybe someone else will give you an input on the taxable income issue.

Is the builder going to issue a 1099 for the $10,000? That will help you make up your mind on how to report. Call the builder yourself.

[Bees Knees]

Bob, you know as well as I do that having a builder decide whether or not to issue a 1099 has nothing to do with whether the payment is taxable or not.

As for the original post, unless someone can come up with a rule where the payment is excluded from income, it is taxable. The code says all payments are taxable, unless specifically excluded from income. [IRC §61(a)] I have yet to see anyone mention specifically why this payment is an exception.

Easement may be close, but this is not an easement.

Casualty loss would be close, but this is not a casualty loss.

A gift would be close, but I doubt IRS would view this as a gift.

An insurance reimbursement would be close, but the payment is not coming from an insurance company.

Reimbursement of expenses under an accountable plan would be close, but this cannot be an accountable plan since the expense is not deductible.

Everything mentioned seems to be close, but nothing has hit the nail on the head. Nothing mentioned so far is an exception to code section 61(a).

The payment is taxable.

[JohnH]

Ask the builder to buy the panels

If the transaction hasn't taken place yet, how would it change things if the builder could be persuaded to simply purchase the old panels form the homeowner rather than just give him the money? Since this isn't depcreciable property, it seems the homeowner would only be taxed on the difference between the cost basis of the panels and the selling price. He could then use the proceeds to buy new panels and take the approriate credit.

[BOB W]

Bob, you know as well as I do that having a builder decide whether or not to issue a 1099 has nothing to do with whether the payment is taxable or not.

Brad> That is correct, the builder is not the final say on taxability or not. But, if non-taxable was a choice or consideration it would be good to know if a 1099 would be issued or not. If a 1099 is issued, the reporting of that income, if less than the $10,000, would need to be explained.

[Kram BergGold]

John, very clever

John, I like your idea.

[Kram BergGold]

Second thought on John's idea

My guess is the solar panels now on the house are very old and have little or no resale value. If this is the case, then if they construct a contract which says the developer will to remove the old panels and pay the owner $10,000 for them I would assume the IRS would categorize this as a transaction with no substance other than to avoid tax. Any disagreements?

[JohnH]

Well, I never said it was a GOOD idea

I was just brainstorming, but it wouldn't be the first time someone purchased something for more than the pure value of its components in order to achieve a greater purpose. For example, a developer who pays $50K for a strip of land with a $2K cost basis and a $10K FMV because he needed it to get access to a road, etc. ( had one of those a few years back)


On the other hand, is IRS likely to dig too deeply if a taxpayer reports a $7K capital gain on an asset he paid $3K for? After all, he's recognizing the gain and reporting it properly. Guess you'd need to think about form, substance, actual numbers, and all that stuff. If it were my client, and if the developer would agree to buy the panels, I'd report the gain just like the sale of any other asset and never look back.

[Luis Mopeo]

The new house blocks the old house's solar panels. That damages the value of the old house. The developer wouldn't be willing to fork out dough unless he acknowledged that fact.

The only question is whether the $10,000 accurately reflects the loss in value. Lacking any other factors, if the developer and the homeowner agree on the amount, that's FMV.

If you damage somebody's property and pay to have it restored, just because the settlement is not paid by an insurance company doesn't mean it's taxable.

From OKC, 82 T.C. 638

"Settlement proceeds may also constitute a return of capital or damages for the impairment of capital, in which case the proceeds are taxable only to the extent that they exceed the basis of the property replaced, and then only as capital gain."

Not taxable.

[Bees Knees]

If you damage somebody's property and pay to have it restored, just because the settlement is not paid by an insurance company doesn't mean it's taxable.

From OKC, 82 T.C. 638

"Settlement proceeds may also constitute a return of capital or damages for the impairment of capital, in which case the proceeds are taxable only to the extent that they exceed the basis of the property replaced, and then only as capital gain."

Not taxable.

Irrelevant.

How is this damaging somebody's property? Was the house damaged? No. Were the solar panels damaged? No.

Therefore, OKC, 82 T.C. 638 is an irrelevant citation.

The payment is taxable.

[Bees Knees]

My guess is the solar panels now on the house are very old and have little or no resale value. If this is the case, then if they construct a contract which says the developer will to remove the old panels and pay the owner $10,000 for them I would assume the IRS would categorize this as a transaction with no substance other than to avoid tax. Any disagreements?

Its a way to partially exclude the payment. Have the builder purchase the old solar panels for their FMV. No tax on the sale because the cost basis in those panels will exceed the sales proceeds. Then only the difference is taxable as ordinary income on line 21, Form 1040.