City removed homeowner's trees...

[Koss]

The city removed three trees from the real estate that is my client's primary residence.

The city did not seize any land through the eminent domain process, and my client did not sell part of the land to the city. The city cut down and removed trees in order to put in a sewer line or something.

The city paid the homeowner $500.00 for each tree.

The city has issued him a Form 1099-MISC which contains $1.00 in Box 1, for Rent, and $1499.00 in Box 7, for Nonemployee Compensation.

This is obviously not self-employment income. Theoretically, it might belong on Schedule D. The guy sold something that was attached to a piece of real estate that he owned. So it might be a capital gain situation. But gain on the sale of your main home is generally excludable from income...

Any thoughts on how to report this?

I'm thinking maybe I'll report it on Schedule D with a basis that is equal to the proceeds, and attach a letter of explanation for the IRS.

Maybe we'll file a formal complaint with the city's legal affairs department or something. This is pretty egregious. I think it is superficially obvious that this is not an appropriate use of Box 7 on Form 1099-MISC.

Burton

[Zee]

I'm curious. Did your client give the city permission to cut the trees? I would think the replacement cost would exceed the reimbursement, no? Your suggested handling sees appropriate, but you might first try to get a corrected 1099.

[Bees Knees]

It sounds to me you are describing an easement. In order for the city to have the right to put a sewer line through the property and remove trees in the way, the city needs to have an easement, which is simply the right to make use of the property for a limited purpose. An easement does not have to be made under threat of condemnation, and the city does not have to seize the land through eminent domain. There are all kinds of easements in place when you own property.

For example, my abstract defines the borders of my property as extending to the center line of the road in front of my house, and to the center line of the river running behind my house. I own the land, but the public has an easement, or right of way to use the land that the road sits on top of. The public also has an easement to canoe the river running through my property. The power company also has an easement to run power lines along the front of my property next to the road, and the phone company has an easement to run phone lines along the same path.

I didn’t sell the land or have the land condemned for any of these rights. I still own the land, but those with an easement have a right to use it for their purpose.

IRS Pub 544, page 2 says the following concerning easements:

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 sep-
arate 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 re-
ceived.

In your case, I would simply reduce basis by the money received by reporting the 1099 amount on line 21, and then zeroing it out on the same line with an attached explanation describing the easement.

[Zee]

It sounds to me you are describing an easement. In order for the city to have the right to put a sewer line through the property and remove trees in the way, the city needs to have an easement, which is simply the right to make use of the property for a limited purpose. An easement does not have to be made under threat of condemnation, and the city does not have to seize the land through eminent domain. There are all kinds of easements in place when you own property.

For example, my abstract defines the borders of my property as extending to the center line of the road in front of my house, and to the center line of the river running behind my house. I own the land, but the public has an easement, or right of way to use the land that the road sits on top of. The public also has an easement to canoe the river running through my property. The power company also has an easement to run power lines along the front of my property next to the road, and the phone company has an easement to run phone lines along the same path.

I didn’t sell the land or have the land condemned for any of these rights. I still own the land, but those with an easement have a right to use it for their purpose.

IRS Pub 544, page 2 says the following concerning easements:



In your case, I would simply reduce basis by the money received by reporting the 1099 amount on line 21, and then zeroing it out on the same line with an attached explanation describing the easement.

If it was an easement, I agree.