Received 1099-NEC from the local government as easement payment. How to make this a part of schedule D (investment gain and loss) for the property, an empty lot?

[KrisD15]

This is a sticky situation.

Form 1099-NEC is Non-Employee Compensation. 

It is used, and only used, for reporting payments to contractors and reported as Self-Employment income by that contractor.

Easements only lower the basis of the property. For example, if you bought a lot for 25,000 and the easement pays 2,000, your basis is reduced by 2,000 to be 23,000. There is no capital gain (or loss) for the easement. The 2.000 gain will be realized when you sell the lot.

There is no reporting required for an easement payment. 

Usually an easement is reported on Form 1099-MISC. The income is not reported, but there is a way to enter the 1099-MISC and then back-out the income so that at least the form is accounted for on the return.

There is also no way to enter Form 1099-NEC into TurboTax without the program demanding Schedule C be filed for the income. 

You'll have to ask the local government to correct the Form and use Form 1099-MISC, or not report the 1099-NEC and be ready to explain the situation to the IRS. 

The only other suggestion I have would be to make a miscellaneous income entry and back that out. That way if you don't get an updated form from your local government office and the IRS inquires, you can show that you accounted for it. 

To do this I would follow these steps:

go to
Wages & Income
Less Common Income
Miscellaneous Income, 1099-A, 1099-C    
Other reportable income    START
Type " EASEMENT ON 1099-NEC" or something similar for the Description and the amount
 

GO BACK TO
Wages & Income
Less Common Income
Miscellaneous Income, 1099-A, 1099-C    
Other reportable income    START
Type " reduction in basis for easement" or something similar for the Description 
Enter the same amount AS A NEGATIVE NUMBER  (put a minus sign in front (-) )

Both entries will be listed on Schedule 1 line 12

Keep the 1099-NEC with your tax file and make note to reduce your basis in that property 

[michell_su]

Thank you for the reply.

If the local government can change to 1099-MISC, how do I report this situation in Turbo tax? Can I ask them to give me a 1099-S? Are they likely to agree? 

By the way, when the local government issues a new 1099, do they usually cancel the old 1099? 

[KrisD15]

If they change and report the income on a new form, they would let the IRS know the other form is no longer valid. 

If they change and use Form 1099-MISC, it can be entered and backed-out as a 1099-MISC. (the way I listed in the original answer)

 The program won't allow that (enter and back-out) with Form 1099-NEC.

Form 1099-S would work as well and maybe be better since that is not "matched" by the IRS the way form 1099-MISC and 1099-NEC are. The 1099-S would be kept with your tax file and addressed if the property was later sold. 

I don't know what the response would be from the local government, it's just a mistake so I don't see them making a fuss. Form 1099-NEC was resurrected several years ago by the IRS so that they could know EXACTLY what income is Self-Employment, but not everyone understands this. Try to point out that it is Non-Employee Compensation. 

According to the IRS:
"File Form 1099-NEC, Nonemployee Compensation, for each person in the course of your business to whom you have paid the following during the year.

At least $600 in:
Services performed by someone who is not your employee (including parts and materials) (box 1); or
Payments to an attorney (box 1). (See Payments to attorneys , later.)"

IRS 1099-MISC versus 1099-MISC 

"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."
 

IRS Easements Pub 544