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Thread: Taxes and pipeline easements

  1. #1
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    Taxes and pipeline easements

    So I need some guidance. I'm doing my taxes and my wife has a small percentage of a property that they sold the easement to DCP Midstream to drop a pipeline across it. We are told that of the total paid a certain percentage of that is allocated to compensation and a percentage to damages to the property. The damages being non-taxable at this point.

    In doing my taxes, we have the breakdown sheet from DCP showing the damage calculations. The 1099-MISC we received simply shows the full amount we were paid(in box 3 as other income). Now, if I'm filling everything out, where do I account for this damage portion? Do I just put a lower # in the line for the 1099-MISC(being the difference of course)? Or do I put in the full amount and then deduct the damages somewhere else? If needing to deduct the damages somewhere else, where does that get done? I can't seem to figure that part out.

    Anyone here a CPA and can help? Anyone ever done this before for their property?

  2. #2
    Without having researched the issue very much, please don't take what I'm about to say as fact, but I'm shooting from the hip which is generally dangerous. However, I was under the impression that a payment for the easement served as a reduction to your wife's basis in the property. The amount serving as consideration for the easement itself is treated as the sales proceeds and the basis in the property will offset the sales proceeds when calculating the gain (long-term if held for more than a year, could be a capital gain without knowing the facts). The damages portion of the payment is taxed in full as ordinary income. I thought that is why they broke out the payment between easement vs. damages. As a general rule of thumb with the tax code, if you ever come across payment for anything, very rarely is it considered non-taxable, so I am not sure where that came from.

    Again, this is from memory so take it with a huge grain of salt. If you're dealing with a significant amount of dollars then you should certainly consult a CPA to make sure it is done properly. On the 1099 reporting, it is never really ideal to report on your tax return less than what the 1099 shows. The IRS will match your number against the copy of the 1099 they received (which they get a copy of every one of them issued) and if there is a discrepancy, especially if your number is lower than what they show, then you will assuredly receive correspondence from them and it is never fun dealing with the IRS.

  3. #3
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    Quote Originally Posted by OKIEinOK View Post
    Without having researched the issue very much, please don't take what I'm about to say as fact, but I'm shooting from the hip which is generally dangerous. However, I was under the impression that a payment for the easement served as a reduction to your wife's basis in the property. The amount serving as consideration for the easement itself is treated as the sales proceeds and the basis in the property will offset the sales proceeds when calculating the gain (long-term if held for more than a year, could be a capital gain without knowing the facts). The damages portion of the payment is taxed in full as ordinary income. I thought that is why they broke out the payment between easement vs. damages. As a general rule of thumb with the tax code, if you ever come across payment for anything, very rarely is it considered non-taxable, so I am not sure where that came from.

    Again, this is from memory so take it with a huge grain of salt. If you're dealing with a significant amount of dollars then you should certainly consult a CPA to make sure it is done properly. On the 1099 reporting, it is never really ideal to report on your tax return less than what the 1099 shows. The IRS will match your number against the copy of the 1099 they received (which they get a copy of every one of them issued) and if there is a discrepancy, especially if your number is lower than what they show, then you will assuredly receive correspondence from them and it is never fun dealing with the IRS.
    It is allegedly a long term capital gain. However, the payment comes as a single check and the 1099-misc shows a single amount. It is in the documents signed that shows the breakdown for damages.

    If the easement is considered a reduction in her part of the property (or partial sale), then how does that get recorded? Clearly I have a 1099 and not a HUD statement. Just not sure how to put this all together.

  4. #4
    Let's say the total payment and the amount per the 1099 is $100. The documents break out $20 of that $100 as damages, the remaining $80 is for the easement payment. The $20 of damages I believe needs to just be reported on Line 21-Other Income on the first page of the 1040. The $80 will be reported as gross proceeds on Schedule D on the long-term capital gain section. The basis in the land, whatever it may be, will be reported on the Schedule D as well and the net difference will be your long-term capital gain or loss. The Schedule D gain/loss amount will flow to Line 13 on the first page of your 1040.

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