What does "reduce the basis" mean when reporting proceeds from sale of easement for power line installation across my property? Proceeds included damages.

[kayden97]

Received payment for "easement interests" and for incentive to settle without litigation and/or damages. Half was paid in 2016, the remainder in 2017. Should I report as sale of investment or as installation sale. Also see responses on AnswerXchange that say use proceeds as basis, resulting in $0 gain, as well as some that say "reduce the basis" by some amount. I'm confused about how, where, and what to report.

[Phillip1 · Accepted solution]

You should report it is a investment (not installment) sale. In the situation of the sale of an easement, you receive funds that are treated as sales proceeds for a piece of land that you still own.

You will need the following items to calculate your gain or loss on the easement:

1. Total basis of your land.

2. The portion or percentage of your land that was affected by the easement.

3. If the portion of the land that was affected by the easement cannot be separated from the total basis of the land, use the easement payment amount as your basis.

The easement payment should produce little to zero taxable capital gain. However, the basis that you use to calculate your capital gain on the easement will reduce your total basis for the entire property when you sale the property later on.

For example, if the land was bought for 100,000 dollars and 20% of the land was affected by the easement, your basis would be 20,000 dollars. The basis in your land will be reduced to 80,000 dollars. If the basis could not be determined, you will reduce the basis of the property by the easement amount.

To enter the sale, do the following:

1. Go to the Federal Taxes category at the top of the window.

2. Choose the Wages and Income subcategory.

3. In the list of "Your Income", find the section labeled "Investment Income" and click "Show More". If the Investment Income is not there, there should be an option to "Add Income" which will generate a larger list.

4. Click start or update next to Stocks, Bonds, Mutual Funds, Other.

5. Answer yes to the question "Did you sell any investments in 2016?"

6. You will need to upgrade to TurboTax Premier at this point.

7. Answer no, you did not receive a 1099-B.

8. Choose Land as the investment you sold.

9. Enter your sales proceeds and cost basis information in the subsequent screens and complete.

[kayden97]

Do sales proceeds include both incentive/damages amount and easement interests amount?

[kayden97]

Yes