How to adjust basis of depreciated asset?

[FixedOn66]

We've received a payment on 1099-S for an easement for a sidewalk in the front of a property we rent to a business. IRS says the income can be recorded as a reduction in the cost basis of the property and we wish to do that in Turbotax but I don't just want to go in and change the basis in the Asset Worksheet. 

Where can that basis deduction be recorded, or better, how? I've seen this asked and answered in very vague terms and specifics are needed. 

Extra credit: Over 40 years, we've already depreciated this property below the amount of the 1099-S but not to zero so we can apply part of the payment to the basis reduction and the rest will be ordinary income by a depreciation recovery, I suspect. How would that be recorded?

[M-MTax]

I agree you shouldn't mess with the worksheets. Keep track of this outside of any tax program.

[Carl]

For starters, the only thing you were paid for, was land. Remember now, land is not depreciated. So this will note change anything what-so-ever on your depreciation one single bit since land is not depreciated anyway.

But what "exactly" were you paid for?

Was the payment for the actual land? Or was the payment for "rights" to utilize that land, and you still own the land? This matters.

If the payment was for the land, then that "should" reduce the amount of land you own, as well as pay property taxes on. This is fully what I expect. But it depends on just who or what entity paid you for this.

[Carl]

Addendum: I just did a test scenario and it appears to me that TurboTax can handle the situation just fine, if you did in fact sell a portion of the land, as opposed to selling the "rights" to a portion of the land.

[FixedOn66]

Thanks for all the replies. Those were helpful in thinking this out. 

Land Only: Correct. While we could never build on this land as it was an easement when we bought it, now that they’ve build a sidewalk, they’ve finalized or perfected (my terms) the easement and evidently had to pay us for the land as we can no longer, for example, park a car or put a temporary sign on that land. So I guess we sold some land. 

However, when we bought this property (remember, 40 years ago) it appears from the assert worksheet that we put the lions share of the basis into the building making it as depreciable as possible. So, the basis of the land is negligible and thus we will have to recognize the majority, if not all, of the payment as ordinary income. 

Thanks again for the insights. It really helps talking.to those who understand taxation and accounting. You guys speak my language. 😎

[Mike9241]

you're assuming that the taxpayer broke out the value of the land from the cost of the property.  in the many years I practiced, I saw many cases where this wasn't done. 

[Hal_Al]

@FixedOn66  wrote  "So, the basis of the land is negligible and thus we will have to recognize the majority, if not all, of the payment as ordinary income".

No. It's not ordinary income and/or depreciation recapture.  It's the sale of non-depreciable land and should be reported as a long term capital gain.  You could allocate the small land basis between the sold property and the remaining property.  But for simplicity, you can call the basis 0 and let the small land basis stay with the remaining property.  You also have the option of using all the land basis for this sale ("front loading").*

*Reference: https://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2602&context=facpub

[Carl]

Here's how I look at it, based on my interpretation of your scenario.

You'll report the sale in the "sale of business property" section.

First screen you select "sale of business or rental property not already reported" and continue.

next screen says select YES if you sold a depreciable asset. So you will select NO on that screen.

Next screen asks if you sold property that can not be depreciated. You'll select YES here.

You'll indicate was held more than a year, then continue.

Enter the description and sales data and continue. That does it for that part only.

Your cost basis can be the entire value you assigned to the land (front loading) or a percentage of the land value equal to the percentage of land actually sold.

Then in the business section where you deal with the Business Assets/depreciation (SCH C I presume) you'll change the amount in the COST box by subtracting the amount you entered earlier as your cost basis on what you sold. Then you will also subtract the cost basis of what you sold from the amount int he "COST OF LAND" box.

Doing this will lower the overall cost basis of the asset without changing the cost basis of the structure being depreciated. This will keep depreciation "on track" while showing a correct cost basis -which of course will be necessary in the future when the property is sold or otherwise disposed of.

Then what you reported in the "sale of business property" section will show either a loss or a gain, depending on the numbers of course. If sold at a loss, the business deduction is allowed. If sold at a gain, then of course it will be taxed as a business sale (which is what it is) as opposed to a personal sale.

[FixedOn66]

Thanks again to all of you, especially @Carl who helped me walk through the TurboTax steps to get this recorded properly. 

This was for my dad whose taxes I do and we somehow over looked this 1099-S, so this is an amended return for 2019. The interesting effect of this change was that because he was still in the 0% capital gains rate, the only tax was on the lost medical expense that got reduced because of the increased AGI. That was a pleasant surprise. State was taxed at a higher rate. The less than pleasant surprise will be when we get the penalty and interest bill. :(

At least I don't do this kind of stupid very often.

Thanks again for your help! 

[Carl]

At least I don't do this kind of stupid very often.

I have a few sayings for that.

- If you're not screwing something up at least once a week, then you're not learning anything new.

- As a computer consultant myself, 99% of what I know is what *not* to do.....and I didn't learn it by not doing it.

[FixedOn66]

- If you're not screwing something up at least once a week, then you're not learning anything new.

I like that! One of my dad's favorite lines was, "The only person who doesn't make a mistake is the person who does nothing."

- As a computer consultant myself, 99% of what I know is what *not* to do.....and I didn't learn it by not doing it.

As the "IT Guy" of my own business I can shout, "Amen" to that!

Thanks again, Carl.