How do I reduce the basis on some farm land for a RR Crossing Easement

[MarcsyPE]

I surrendered to the railroad an access easement for a railroad crossing they wanted to remove for value received.  It was for about the cost to build a new road to the property.  However, I have land adjoining it that I may just grant an easement across if I should decide to sell it independent of my original farm.  How do I adjust the basis of the land for this partial sale e.g. part of the original access easement that ran with the land. I am pretty sure it is not taxable since it is less than my basis in the land. I still have the land so do not believe that the basis for the easement was the entire purchase price.  If I get an appraiser to develop the value of the land with and without the easement and find that the amount received when costs of the lawyer and appraiser was less than the difference, can I take a loss or is the land basis just reduced by the amount of proceeds less those expenses.  Which form on Turbo Tax do I show that?    

[JamesG1]

See the IRS qualifications below but, generally, the amount received for granting an easement is subtracted from the basis of the property.  The transaction is reported as a sale of property and listed on Schedule D.

The land basis would be reduced.  Sales costs would reduce the net proceeds.  As an example,

Land Basis                           $50,000

Payment                               $11,000

Sales costs                           $1,000

Payment                               $11,000 less $1,000 = $10,000

Adjusted Basis                      $50,000 less $10,000 = $40,000

Report the transaction under sale of second home.  Choose land as your option and report the basis of the land equal to the payment.

• In the upper right hand corner of the screen, click on the magnifying glass Search. Enter sale of second home. 
• Click on Jump to sale of second home.
• At the screen Did you sell stocks, mutual funds… in 2020? Click Yes.
• Under type of investment click Other.

See this TurboTax Help.

See IRS Publication 544 Sales and Other Dispositions of Assets.  Click down the left side under Easement.

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 separate 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 received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

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. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. 

[MarcsyPE]

James, Thank you very much for your response. Only thing is it is we actually had to surrender the easement as the railroad wanted to eliminate the crossing. We got paid an amount to give it up. It was not really voluntary but we finally agreed to do it for consideration. It creates a liability for me in the I will have to either run a new road to a public road to ever sell the land or cross my existing farm and grant an easement to the property across my existing property which adjoins it to sell it independently. Alternatively I can just add it to my existing property and just treat it as one property once that tract is paid off.  I am getting an appraiser to calculate for me the impact of those options and was considering that to be the basis in the land of the easement. Then if the value received is less than that do I get to take a LT capital loss, or does it still just affect the basis?     

[JamesG1]

I had a feeling that your situation did not fit into a neat box.  After your explanation, please review these circumstances from other parts of the IRS Publication 544 Sales and other Dispositions of Assets. 

Click down the left side of the page and click on Easements and Gain or Loss From Condemnations.

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.

And

You are considered to have made a forced sale, even though you keep the legal title.

And

If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award.

And

If your net condemnation award is less than your adjusted basis, you have a loss. If your loss is from property you held for personal use, you cannot deduct it.

It sounds like your situation may allow you to consider the transaction a forced sale and/or condemnation sale and you may be able to claim a long-term capital loss.

IRS Publication 544 Sales and other Dispositions of Assets.

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 separate 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 received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property. 

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.

However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. See Gain or Loss From Condemnations, later.

Gain or Loss From Condemnations

If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award.

[MarcsyPE]

I was sent a 1099-NEC from the RR that I believe I should not have received. It put all the settlement amount in Box 1 which would imply it is service income. If I am not mistaken in April 2011 in Public Law 112-9 it took out the language requiring information reporting of any "payments for property and other gross proceeds", e.g. 

"(b) PAYMENTS FOR PROPERTY AND OTHER GROSS PROCEEDS.—
Subsection (a) of section 6041 of such Code is amended—
(1) by striking ‘‘amounts in consideration for property,’’,
and
(2) by striking ‘‘gross proceeds,’’ both places it appears.

In an August 9, 2012 memorandum from the Office of Chief Counsel IRS attorney entitled:  "Form 1099 Requirement for Claims"  it states  "Under section 6041 and Treas. Reg. § 1.6041-1(a)(1), the settlement payments made by Taxpayer on ----------------- claims are in fact made in the course of its trade or business, but the issue is whether such payments are “fixed and determinable income” under Treas. Reg. § 1.6041-1(c). Taxpayer has indicated that it does not know whether the ----------------payments constitute income to its customers because its customers did not disclose their basis in X, similar to the scenario described in Rev. Rul. 80-22. Therefore, under either factual scenario presented by the taxpayer (i.e. making the settlement payment via a dual party check sent to the attorney or via two separate checks to the attorney and customer), such payments will not be considered “fixed and determinable income,” and there is not a Form 1099 filing requirement."

Since it is apparent that the payment was for surrender of an easement, something that was tied to the land,  and the RR had no idea of my basis or how the payment would be handled they had no obligation or right to send me a 1099.  It had been removed from the scope of a 1099 and a 1099-NEC was totally inappropriate.  Do I have to wait on my lawyer to resolve this and to get the payor of the settlement to issue a corrected or should I send a letter to the IRS stating that in fact it is a wrongfully issued information return?  I need the refund I am entitled to from my return. It is significant.   

[SamS1]

For easements I have seen have been reported on a 1099-S.  The 1099-NEC in box one would be incorrect.  Report it under the 1099-S would have triggered the 2nd home sale method mentioned above and reporting would flow to the Sch D, Capital Gains/Losses.  Or they should have reported it with a 1099-MISC and indicated it was rents.  There you would report on the Sch E and could allocate a portion of your RE taxes, Insurance, etc to offset the income.  Either way, the 1099-NEC is the wrong form.