1099 NEC and easement compensation

[KC0997]

City government compensated a permanent easement for sewer line and a temporary construction easement. The temporary construction easement releases all claims from city back to owner after completion. The compensation was lumped into one payment and not specified between the permanent and temporary easements. I received a 1099 NEC from the city for the compensation. Is this 1099 correct, and how should this be reported to IRS on taxes. This is very confusing as to what information I have read on easement compensation. Thank you in advance. 

[PatriciaV]

Yes, a temporary easement is treated as rental income and is reportable on Form 1099-NEC to the owner to be reported on Schedule E. Payments for permanent easement sales are not considered income. Instead, the payment lowers your basis in the property.

Since you received Form 1099-NEC you will have to report the "Rental Income". When you enter the Form 1099-NEC, it will trigger TurboTax to create a Schedule E. Edit this Schedule E (under Rental and Royalty Properties) to complete the property profile. Leave the days rented blank.

To offset the basis adjustment, under Other Expenses, report the amount of basis allocated to the portion of your property covered by the permanent easement. A possible description would be "Reduction in basis for easement." 

To determine the allocated basis, use a percentage of the property covered by the easement. For example, if you have a quarter of an acre (10890 sq ft) and the easement covered 109 sq ft, then you gave up 1% of your property. Multiply your basis in the property (land only) by 1%. This is the basis for the easement.
 

For more information on property easements, see: IRS Publication 544 Easements

[KC0997]

The issue I have, is that the city sent a 1009 NEC for one sum, for both permanent and temporary easement. The city did not separate compensations between temporary and permanent easement. Should there not have been a 1099s or 1099misc for the permanent and 1099 NEC for the temporary? How do I differentiate between the two?

[KC0997]

For clarification. The easement project was a30’ permanent sewer easement and a 20’ temporary construction easement, and one lump sum payment for compensation was made with no differentiation between the easements. It seems to me the city has not done their due diligence in defining the difference. I could say all was compensated for a permanent easement or say that all was temporary. 

[PatriciaV]

It's unlikely the city will provide a breakdown between the permanent and temporary easement payments. But you could ask.

The assumption is that whatever is not included in the basis for the permanent easement is rental income for the temporary use of your property. You cannot deduct more than the basis for the square footage lost to the permanent easement. The balance will be income that you are expected to report on your tax return. If the property basis is more than what you were paid, you would totally offset the income and have zero taxable income. It all depends on your allocated basis for the 30 feet of permanent easement. Be sure to keep your calculations with your tax file for this year in case you need to prove your deduction.

[Zapit]

I received moneys for a temporary construction easement, but the utility company sent me a 1099-s.  I thought rentals would be on a 1099-misc and the permanent easement was on the 1099-s?

[PatriciaV]

You might check with the utility company to confirm this is a temporary easement. If so, treat the amount on the 1099-S as rental income, with sufficient backup (copies of correspondence) to prove the true character of the income. You should also request the correct Form 1099-MISC.

The only advantage of a permanent easement on Form 1099-S is that you can adjust your basis in the square footage of your property. If the adjustment is at least as much as the amount on the 1099-S, you would not report any income.

@Zapit 

[Zapit]

Patricia, in a February 8, 2024 post you wrote:

Yes, a temporary easement is treated as rental income and is reportable on Form 1099-NEC to the owner to be reported on Schedule E. Payments for permanent easement sales are not considered income. Instead, the payment lowers your basis in the property.

     The actual contract between myself and the utility company is for a Temporary Construction Easement (TCE) which I figure is "rental".

     I am confused about which 1099 is for a this TCE - a 1099-MISC or a 1099-NEC.  Maybe it doesn't matter?













Does it matter

[Zapit]

I just spoke with a utility representative, and it appears that the 1099-MISC should have been sent as this easement was for a temporary period of time.  The accounting department probably thought it was a purchase - which would make the 1099-s form valid.

     Also, it appears the 1099-NEC would/could be used for some sort of employment payments to subcontractors/self-employed folks.

     Bottom line, it appears a 1099-MISC is the proper 1099 for a temp easement.  To avoid any IRS hassles and extra paperwork, I am asking the utility company to send a 1099-MISC.

Wish me luck.

Thanks for everything

[KrisD15]

Yes, Form 1099-MISC will allow you to report the income several different ways, including as rent income. 

Form 1099-NEC is Non-Employee Compensation. That can only be reported as Self-Employment income, which means there would be Self-Employment (FICA) tax charged.  

Form 1099-S is for Sales or exchanges of real estate. 

Let us know if you have any additional issues. 

[Zapit]

The problem with the utility Co. sending a 1099-misc AFTER it has already sent a 1099-s is that the IRS may now figure you have been paid TWO different times - so getting the company to send another 1099 seems like a bad thing to do. 

Also, I searched the pdf instructions for 1099-NEC and there is no mention of easements?

[MarilynG1]

The 1099-NEC is usually issued for self-employment income, but can also be used for a one-time payment.

A 1099-S is not reported in your tax return; only the info from the form gets entered in a sale situation (and even then not always), so don't worry about the IRS thinking you got paid twice.

Here's more info on Form 1099-Misc and How to Enter a 1099-Misc.

@Zapit