Hayneville Shale Land Damage

[Donanita]

Client has a pipeline being run through his property and gas company paid $41000.00 for easement rights but has in their paperwork that $16271 is for property damage to his land.
Would the damages be deducted on Sch E or on Sch D as loss.

[Snaggletooth]

Great Title Donanita

...reminds me of the "Johnstown Flood" or the "Carroll County Accident."

Of course, I don't know the answer to your question, just wanted to jump in and say something dumb.

Apparently, someone has gone to a calculation to estimate loss in value to the land. Land with a pipeline on it cannot be developed, and can also affect value even as farmland, when you take into consideration the land around the pipes can't be tilled. I think the best you can hope for is to take the $16K and not report it as income, but instead deduct it from the basis of the land (but not below zero).

I would rather you not act on what I say, but maybe listen to someone who can give you cites. Above scenario may operate very much like a taxable condemnation.

[Donanita]

Would Love To

not report the 16k but client will receive a 1099 for $41000. There was a lot of timber loss as trees had to be removed.I will be having a lot more of these as this is the largest gas find in the country. Have been doing est tax all summer. There are a lot of people who have been make millionaires overnight. Land leasing for $22,000 a acre.Just wait until the royalites start coming in.

[Burke]

See Pub 225 (Tax Guide for Farmers), page 17, about the tax treatment of easements and rights-of-way. He has to know his current basis in his property allocated to acreage, and possibly broken down further into sq ft. (43,560 sf per acre). The company's calculation of damage was probably based on FMV, not his original basis. You can't use that on his tax return. If the payment (total) exceeds his land basis, he has a gain of the difference, which may well be the case here. It would be a long-term capital gain, goes on 4797 if he is a farmer, and if just land held for investment, it would go on Sche D. See also previous threads on this subject -- use Search feature and type in "Easements." Amts received up to his basis simply reduce his basis.

[Donanita]

Easements & Damage

Part of the money I believe is payment for easement for running the pipleine through the property but there was damage that incurred on the property. Would this payment for damage still reduce the basis of the property. Client will receive a 1099 misc with amts classified as rents.Don't see that a Sch F would help as his is not a farmer.If all the $41000 is included as income and no deduction for the damage the client will not be able for his IRA deduction because of high income. Told him about a ROTH but he wants a traditional.

[Burke]

Classified as "rents?" How do you know this? This would usually go on 1099-S. You would show gross proceeds less basis = net gain. You mentioned trees. Is this what the damage was for? Note reference in Pub 225 re: damage to growing crops. That is ord income. The basic rule for a casualty loss is, FMV prior vs. FMV after. And if you are compensated for a loss, there is no tax loss. Does the paperwork go into any kind of detailed explanation as to how purchase price was calculated other than what you have said here?
I have re-read your post and although it is not clear, did you mean that he got two payments? One for $41,000 and another for $16,271?

[Burke]

Here is some additional information which might clarify: You said company paid TP for "easement rights." You need to review the contract paperwork to see what the actual wording of the document says.

(1) Sale of Mineral Rights = Cap Gain, basis zero, (unless determined when land was purchased), must be permanent and cannot revert back to owner;

(2) Sale of Right of Way or Easement (Sale of Surface Land) = Cap Gain, basis as determined by usual means; also, must be permanent and cannot revert back to owner;

(3) Lease of Mineral Rights = Ord Income, report on Sche E, line 4, depletion goes on Line 20, Sche E;

(4) Lease of Surface Land = Sche E, rental income, no depletion.