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.