Thank you very much for your thoughtful reply, Victoria.
Perhaps I should add details and a few follow-up questions to explain the underlying issue and be sure I’m correctly understanding your comments. Kindly overlook any of this specific information that’s not relevant.
My question does not involve a permanent easement or a rural setting anticipated by IRS Publication 225. It only involves a temporary construction easement affecting the small front yard of our home in an urban setting.
Our State is constructing a light rail public transit project along our street that will take several years to complete, perhaps three more years. No doubt it will take longer than the “period of months” that you mentioned. During construction, the State will have access to about 10 percent of our yard and eventually regrade that area to conform to a new street level. Several of our large trees and a hedge have already been removed. Other trees and shrubs will follow along with parts of the driveway, sidewalk, etc.
There is no contract so far, just an offer, covering both use and damage, which we did not accept. When we did not agree on fair compensation, the State deposited the amount it offered into a Court escrow account. The Court fully distributed that to us plus interest pending the outcome of future proceedings. We may need to repay some of the principal if the Court eventually decides a lower compensation amount is appropriate. We did not receive a 1099 for either the principal or interest, although the Court does have a W-9 on file.
So my specific question boils down to: How, if at all, should one include income like this in a tax return?
Do any of the details I’ve added change your comments? This issue is confusing to me, and I want to do what’s right.
Without a permanent easement, my impression from your comments is that all of the principal we received needs to be reported as rent in Schedule E (except for the escrow interest reported in Schedule B). This “rent” includes amounts received for both the use of and the damage to our yard. (Perhaps an appropriate Schedule E “expense” under these circumstances would be a prorated amount of real estate taxes paid on the part of the yard occupied by the easement?)
If, however, the “current damages” you described refer to temporary easements (as well as permanent ones), is an offset to cost basis required instead of reporting ordinary rent income? Would that even include current damages to be corrected in future tax years? How would one even guess the cost basis of an old sidewalk or tree?
I hope this additional information is clear and gives a more complete picture.
Thanks again!
