Temporary Workspace Agreement - Consideration and Damage payments

[Tucky512]

I live on the edge of a gas pipeline in Pennsylvania that will undergo repairs.  While the pipeline isn't on my property, they will need access a very small part of my land (.03 acre) for their equipment during the ~ 2 month pipeline repair.  They have provided me with a Temporary Workspace Agreement with 80% of the payment earmarked for 'damages' and 20% for 'consideration'. (They may need to cut down a few trees.)   They will not need use of my land after the repair is done.  I've looked here and it appears that I should report this as some sort of income, but I'd like confirmation. 

FYI - When I asked the pipeline rep about taxes (they sent a "Request for Taxpayer ID Number and Certification" form in the packet), his reply was "I believe the money will be tax free."  I provided him links to a few similar questions here noting it must be reported as income is some way, and asked for a formal source for his "I believe..." statement.  Again, I got 'I've done this for years... when others received statements at tax time and called him,  "I (the rep) called the company and told them it was tax free and they understood and made the correction."  That was pretty much his exact reply, mentioning that those were for much larger payments than mine.  So, is there a minimal amount that is / is not taxable?  For someone who does this work all the time, I feel he should KNOW definitively how these payments are looked at from the tax perspective.  The lack of definitive answers from them really irks me - I'm ready to decline my permission and/or ask for a higher payment!  Thanks for any advise.

[Mike9241]

The 20% consideration appears to be for the use of your land to store their equipment. in other words, it's rent and taxable. the other 80% see this link  

https://www.osti.gov/biblio/6138163 

[Opus 17]

It depends if you have actual damages.

To the extent their activities decrease your property value, the money is tax-free but you reduce your cost basis, which may increase your taxable capital gains when you sell.  You may also need a before and after appraisal to document the lost property value.  

If the activities do not reduce your property value (because the area affected is insignificant, because nobody would probably notice a few trees in the corner of the lot, and so on) then all the money is taxable.

[Tucky512]

Ok, thanks - I see the abstract, but not the complete article.  "Payments for damages can be taxable as income, or can be nontaxable as a return of capital."  Basically, the damage payment is paid before the work starts.  I do not anticipate any true damage except for the trees they say they may need to cut down. (This slice of my property has nothing but trees, attached to ~ .5 acres of MORE trees between the house and the slice they want to use.)  But overall, I believe you that for the most part, at least some portion of the payment should be reported on taxes (and the rep is just lying to me).  Thanks

[Tucky512]

There really would be no damages - it is just a slice with a few trees at the back end of about .5 acre of trees behind my home.  They are paying both portions of these fees up front.  I can't see it decreasing my property value as 1) the loss of a few trees is negligible.  2) plus, the small substation / pipeline right of way where the construction will happen has been there longer than I have owned the home (28 yrs)... I can't see that replacing  a pipe that already exists harming the value.  (they aren't digging a new line, etc.)  Thanks - seems the pipeline rep if uninformed (willfully, I'm sure.)

[Opus 17]

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@Tucky512 wrote:

There really would be no damages - it is just a slice with a few trees at the back end of about .5 acre of trees behind my home.  They are paying both portions of these fees up front.  I can't see it decreasing my property value as 1) the loss of a few trees is negligible.  2) plus, the small substation / pipeline right of way where the construction will happen has been there longer than I have owned the home (28 yrs)... I can't see that replacing  a pipe that already exists harming the value.  (they aren't digging a new line, etc.)  Thanks - seems the pipeline rep if uninformed (willfully, I'm sure.)

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Who knows what the utility rep knows about taxes.  If you were giving them a new property easement, that permanently decreases the value of your land, at least notionally, making the payment non-taxable, and the rep may be more used to dealing with that kind of payment.  Since you don't expect your property to lose value, you should plan on the entire payment being taxable. 

[Carl]

I don't think the utility rep was lying to you. I think it's most likely he doesn't have a clue, and was saying whatever was required to just make you go away. Besides, I would not expect a utility rep to have the first clue anyway, when it comes to tax treatment of any payments made to you by the company/business they work for.

Basically, I have no doubt that at least the 20% is taxable income for "renting" that land from you. More than likely though, instead of reporting it as rental income on SCH E, you may be able to just report it as "other income" so you don't have to deal with all that SCH E stuff for just a one time payment.

The remaining 80% may or may not be taxable. If whatever permanent changes they make to the land decrease the value of the land, then you would have "in essense" sold a portion of, or something on that land (such as the trees they cut down) to them. More than likely the compensation amount for that would not be taxable. But you would be required to reduce your cost basis in the property by the amount of compensation received for those permanent changes to the property. That would not come into play however, until you either sold the property, or converted it to some type of business use. I doubt you would do the latter with vacant land. But there are scenarios where it could very well be possible.

[Opus 17]

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@Carl wrote:

I don't think the utility rep was lying to you. I think it's most likely he doesn't have a clue, and was saying whatever was required to just make you go away. Besides, I would not expect a utility rep to have the first clue anyway, when it comes to tax treatment of any payments made to you by the company/business they work for.

Basically, I have no doubt that at least the 20% is taxable income for "renting" that land from you. More than likely though, instead of reporting it as rental income on SCH E, you may be able to just report it as "other income" so you don't have to deal with all that SCH E stuff for just a one time payment.

The remaining 80% may or may not be taxable. If whatever permanent changes they make to the land decrease the value of the land, then you would have "in essense" sold a portion of, or something on that land (such as the trees they cut down) to them. More than likely the compensation amount for that would not be taxable. But you would be required to reduce your cost basis in the property by the amount of compensation received for those permanent changes to the property. That would not come into play however, until you either sold the property, or converted it to some type of business use. I doubt you would do the latter with vacant land. But there are scenarios where it could very well be possible.

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We've already gone over 90% of this.

I would not count this as "rent" and prepare a schedule E.  Just report it as other income.

You are also not bound by the utility's determination of the 80/20 split.  If you determined you had a loss in value that was equal to or more than the so-called 80%, you would be entitled to treat it as such, notwithstanding the utility company's calculation, which is just their internal justification.

But as discussed, you do not expect your property to lose value as a result of the work, so the entire amount would be taxable other income, and you don't modify your property's cost basis. 

[tagteam]

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@Opus 17 wrote:

I would not count this as "rent" and prepare a schedule E.  Just report it as other income.

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I concur, 100%.

Further, assuming @Tucky512 receives a 1099-MISC with the compensation figure in Box 3 (as I would expect), that should eliminate any argument suggesting that this should be reported on Schedule E.