Utility Easement taking by eminent domain

[6baldeagle8]

Consumers Power is putting a utility easement across my property. Consumers wants to issue a 1099S for $26,000 to reimburse me the cost of timber removal, stump grinding, and leveling the ground so Consumers can install their power lines. Consumers tells me this is for reimbursement for damages incurred in the removal, grinding and leveling. Consumers says this is not taxable income since it is reimbursement for damages caused by the utility easement. Is this true that it is not taxable to me?

[Mike9241]

Payments received from a utility for permanent access easement are not treated as income or taxed in the year received 1)2 ). Instead, the payment lowers the basis of the property. However, if the easement is considered part of your property and the utility company requires access to it, you may be liable for continuing property tax payments on your full property size. If you get money for easement rights, it's usually taxable income 3).

 1)  https://www.sapling.com/12068191/tax-treatments-easement 

Utility easements are the more straightforward and traditional easements a residential property owner may come across. Your utility companies may need to use a portion of your property for telephone poles and wires, storm drains, electrical power lines or gas pipes below the surface. The utility companies compensate the property owner for permanent access, including possible damage to property in the contract when the easement is granted. Any payment received from a utility for permanent access easement is considered a sale of property, not treated as income or taxed in the year received. Instead, the basis of the property is decreased by the amount of the easement. This will affect the amount of annual depreciation and the capital gain subject to tax when you sell the property. In some cases, the city or utility may require temporary access to your property for maintenance, surveys or other reasons. payments for such access it is considered income, and should be reported on Form 1040,  as other income.

2) https://ttlc.intuit.com/community/taxes/discussion/i-received-a-1099misc-for-proceeds-from-selling-a... 

3)https://budgeting.thenest.com/easement-payments-taxable-income-32488.html 

If you allow a temporary easement, even one that runs for several years, that usually counts as rental income and is taxed at the same rate as regular income.

3) another situation where the payment would be taxable would be when you are still required to pay real estate taxes on the easement but you negotiate with the utility to reimburse for these taxes 

for taxable payments, you would likely get a 1099-MISC

you'll get a 1099-S so this would indicate a permanent easement. while not taxable it still needs to be reported. you would show cost equal to the 1099-S amount so no gain or loss. 

[Opus 17]

Basically, this is not taxable income, but it reduces your cost basis, which may result an increased capital gains taxes when you sell the property.

Since you are expecting to receive a 1099S, you need to report this on your tax return as though you sold part of your property to the utility company. Enter it under sales of other assets, not sale of your home. Use the purchase date as the date you bought the property, the selling date is the date of the easement, and the purchase price and the selling price are both the same amount of the payment on the 1099S. That will result in no taxable capital gain.

keep records with your other important tax papers for as long as you own the property +3 years after you sell. When you sell, you must reduce your cost basis by the amount of the easement payment. For example, if you bought the property for $100,000, and you are granting this easement for a payment of $26,000, then whenever you eventually sell the property, you will report that your adjusted purchase price was $74,000. 

[6baldeagle8]

Mike9241 and Opus 17:

Thanks for the insightful info.

Consumers says it will pay the 26K for me to to hire a contractor that I retain to remove the trees, limbs, grind the stumps, and level the ground in the area of the stumps so the easement will be clear of any debris so it can string its lines, poles etc.. Consumers wants me to get bids. I don't know why it just doesn't contact contractors and pay them. Consumers says vthat the 1099S will be issued to compensate for "damages" to the property caused by the above. If this is correct, are such damages taxable.

Consumers says for the actual permanent easement access that I'll get a separate  much smaller amount on a separate 1099, which I assume will be taxable.

Thanks again.

Bald Eagle

[Opus 17]

The payment for the permanent easement is not taxable, it is an adjustment to the basis for the reason I described.

The payment for clearing the land to make it ready for the utility work is a bit odd.  I agree they should really do their own work and assume liability for it.  By making you hire the contractor, you are assuming liability (through the contractor, whom you should make sure has all the appropriate insurance and permits and so on.)   It's not really payment for "damages", unless they pay more than the work costs.  Then that portion really would be taxable (but not the whole payment).  (For example, if clearing and leveling the land costs $20,000 and they pay you $25,000, with the extra to compensate for the noise, loss of a pretty view, and so on, then $5000 would be taxable.)

I'm not quite sure how to report this on your return to make it not taxable.  I think, that clearing the land to allow for development would be considered an increase to your basis if you paid for it yourself, then if you are reimbursed, it decreases your basis by the same amount, so it's a wash in the end, but not taxable income to you.   

(If you did end up paying tax on the payment for some reason, then you would be allowed to claim the cost as an increase to basis, which might reduce future capital gains tax.)