Easement

[Judysam]

If part of personal residence land is sold to the state for an easement, is that amount always added back to basis? Or, in some cases, is it taxable?

I meant to say does the amount always decrease the basis or could it be taxable?

[Roland Slugg]

Capital gain

Dear Judysam

The sale you described produces capital gain, and you should allocate a reasonable portion of the real estate's basis to the portion on which the easement is granted. However, if the house and remaining land is sold within two years, the easement "sale" should qualify for the §121 exclusion if the rest of the real estate so qualifies.

If the sale was made under the threat of condemnation (or actual condemnation), it constitutes an involuntary conversion. In that case the gain can be deferred if replacement property is acquired within the time allowed ... two years, if I remember correctly.

[Bees Knees]

Dear Judysam

The sale you described produces capital gain, and you should allocate a reasonable portion of the real estate's basis to the portion on which the easement is granted.

Not always. Pub 544 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 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.
Any amount received that is more than the
basis to be reduced is a taxable gain. The trans-
action is reported as a sale of property.

It’s only treated as a taxable gain if the easement payment exceeds basis. Otherwise it is merely an adjustment that reduces basis.

[Roland Slugg]

Misleading

That quote from Pub 544 is incomplete and misleading. It goes on to say:

"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."

In order to know the tax treatment of the easement in question, the nature of the easement must be considered.

[Bees Knees]

That quote from Pub 544 is incomplete and misleading. It goes on to say:

"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."

The poster didn't say it was a perpetual easement where no beneficial interest in the part of the property affected by the easement was kept.

To me, if you can't use the property anymore for any purpose after the easement, it’s no different than an outright sale. I don't think that is a typical easement. A typical easement is where you still have access to your property. You are simply giving the right away to some government or utility company to use your property.

I agree, however, it does depend upon the circumstances.