Multiple Owners of property - rules for distributing gain from easement

[vzyyc7]

I own land with my mom and my brother.  It is grazing land in South Dakota that is rented out.  My mom is currently getting that income.  The US Fish & Wildlife Service has a Grassland Easement Program we are planning to join.  It will be a permanent easement on the land that it must stay as grassland.  

I have a few questions:

1) is this payment considered a Capital Gain instead of income?  Based on my research since it is a permanent easement it would be a Capital Gain.

2)  Do we have to divide up the payment equally and each put 1/3 on each of our taxes?  Or can we split it up anyway we want and that amount would be used for each persons taxes?

3) Are there any special rules due to the money coming from the Federal Government in relation to doing taxes? 

4)  Any rules that allow some of it to be shielded from taxes?

[Hal_Al · Accepted solution]

Q.  Any rules that allow some of it to be shielded from taxes?

A. Yes. Or, more accurately, allows you to defer taxes (which will be capital gains later).

You don't usually report payment for an easement.  You  only reduce your cost basis in the remaining property, by the amount you received, for when the property is sold in the future.

 But, if you got the 1099-S, it must be reported on your tax return, but it is still, most likely, not taxable.  For how to enter the 1099-S, see https://ttlc.intuit.com/community/taxes/discussion/you-don-t-usually-report-payment-for-an-easement-...

[tagteam · Accepted solution]

I agree with @Hal_Al.

Permanent easements qualify for like-kind (Section 1031) exchange treatment but you most likely will simply reduce your basis in the property (hence, no capital gain to defer at this point unless the payment exceeds your baais).

There are also no particular rules that apply as a result of the payment coming from the federal government. 

Further, you can split the proceeds in whichever way (in terms of percentage) that the owners decide. The default, however, is a split in accordance with the ownership interests.