Do I report as income $24,000 received for oil pipeline easement, $2,200 on 1099-S (market value) and $21,800 on 1099-MISC (inducement)? Where?

[dmelnick1]

Received 2 1099s from oil company -- MISC and S.  I assume the MISC was payment of an inducement to avoid litigation under eminent domain.  Is this considered an  intent to earn money or not?

[RichardG · Accepted solution]

Payments for utility easement sales do not get reported as income on your tax return.  Instead, the payment lowers your basis in the property.  That only becomes important later when you sell the land.  The only time you report the payment as income is when the payment exceeds your basis in the property.  Please follow this link for more information.  https://www.irs.gov/publications/p544/ch01.html#en_US_2015_publink100072442

However, the buyer has reported the sale to you (and the IRS) on Form 1099S.  The IRS will often send letters to the taxpayer in this situation and attempt to add the sales price to your taxable income.  If this happens to you, you'll need to write back to the IRS and explain the payment was for a utility easement.

The "inducement" payment is an odd situation.  Arguably, that payment is part of the easement sale, and should receive the same tax treatment as the money reported on the 1099S.  If you choose to include the inducement payment in income, answer the "intent to make money" as no to avoid triggering self-employment tax on the payment.