On your own records, you reduce your cost basis in the remaining property, by the amount you received, for when the property is sold in the future.
The IRS gets a copy of that 1099-S, so they expect to see it reported on your return.
Report the gross income then show the same amount for your basis, for a net gain of 0. On your own records, reduce your cost basis by the ROW payment amount for future sale.
Entering at the 1099-S place in TurboTax (TT) is the easiest way. So, type> 1099-S, sale of property other than main home <in the find box. Then click on "Jump to".
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If this is your main home, there is an alternate way to do it, but since you indicated you want to treat it all as damages, you should use the above.
Option 2. The portion that is "damages" is only a reduction in cost basis. You have to estimate or guess what the cost basis in the land that was taken is. The cost basis you show on your tax return is that number plus the damages portion of the 1099. Your real estate tax bill is a good place to start. For example if the tax bill says 25% of the total assessment is for land, and you sold 10% of your land; then a good estimate of your cost basis is: 0.25 x 0.10 x original purchase price. You reduce your cost basis in the remaining property by the amount you claim as basis on this "sale".
There is a a tax exclusion for the sale of a home, or partial sale. So, even if you go thru the complicated procedure for #2, you end up owing the government nothing.
For option #2, type> home - sale of home <in the search box
