How do I report compensation received for an permanent easement reported on a 1099-misc?

[whenry5]

A similar question was asked in June 2019 and the answer was to report the 1099-misc in Other Common Income with a description such as "Easement Payment" for the reason and the income would show as a line item on line 21 of schedule 1 of the 1040. It then said to make the adjustment for the reduction in value(basis) by making an entry under "Miscellaneous Income , 1099A 1099-C""Other Reportable Income" with "Reduction in basis for easement" as the reason and to enter the easement payment as a negative number. I said the 1099-misc and the adjustment would then show om Schedule 1 and line 21 and flow to the 1040.

In August 2024 a user reported that he had followed the above instruction in 2022 and the IRS did not accept it. HE said he was instructed to reflect it as a capital gains transaction on form 8949 and Schedule D. HE did so and made the cost basis equal to the proceeds resulting in a zero net gain. The IRS accepted this approach.  What is not clear is if the payment had been reported on a 1099-misc or a 1099-S. My understanding is that that would make a difference on how the payment should be reported.

So, what is the correct way to report payment for a permanent easement reported to the IRS on a 1099-misc?

[Vanessa A]

You would report it as a sale of property (land) under investment income. The steps below will report it on form 8949 and Schedule D.

As for the cost basis of the property, it depends. If the amount you received is close to what that part of the property would cost, then yes, you would be able to use that as the cost basis.  However, if you received $75,000 and your total property is work $100,000, you would need to do some math and make the cost basis make sense.  

You can use the square footage of your total property compared to the square footage of the easement and then allocate the percentage of the easement to the total cost of the land.  You can generally find your land value using your property tax records. 

Example.  Your total land value is $50,000 and the easement is 10% of your total property.  You would only claim $5,000 as your cost basis.  It is possible this is a taxable gain.

Also, when or if you do sell the house, you will need to deduct the amount you received for the easement from your cost basis.

You would enter the sale of the land by clicking the following:

1. Federal
2. Income
3. Show More next to Investment Income
4. Start next to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B) 
5. Select Other
6. Continue through and select land for the type of investment
7. Answer how you obtained it
8. You will need to enter the selling price, dates and the cost basis   

Note, your navigation sequence may be slightly different.  You can also use the Jump to feature by entering investment sale in the search bar at the top of the screen. 

[whenry5]

Does this apply when title to the land was not transferred?

[whenry5]

Per IRS Publication 544, If it is impossible or impractical to separate the basis if the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. As title to the ground on which the easement was granted was not transferred and part of the compensation was for the impact of the value of the entire tract of ground is it practical to separate the basis out?

[Vanessa A]

In general, you do not transfer the title to the property with an easement.  Instead, it is the right for use of the property which may or may not limit your use of the property.  It really depends on the type of easement. 

Yes, if it is impossible to separate the basis of that part of the property, you would use the amount that you received as the basis.  However, always be sure that it IS impossible before taking that route.  The clause that says about impossibility is not meant as a free pass on capital gains for everyone.  It should only be used when you truly cannot determine the basis of the property given up for the easement.