How to report right of access easement income

[taxu2]

Client was offered a one time payment from a company for an easement on is property. The easement will last 50 years. Does this income need reported and if so, how? Or would it just lower the basis of the property when sold?  

[IRonMaN]

Yes it would reduce the basis.  If a 1099 was received report the income and show basis as the same amount as the proceeds.

[taxu2]

If the company pays the same amount or more than what the owner paid for the ground, would the same rules still apply? Would he just report the income when / if he sells by reducing the basis? 

[George4Tacks]

@sjrcpa says "The more I know, the more I don't know." So true, this is not something I have dealt with, but I did find this article to be very interesting. 

https://lawprofessors.typepad.com/agriculturallaw/2022/11/tax-issues-associated-with-easement-paymen...

[Terry53029]

The details matter. from pub 544:

Easement. The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

You should research pub 544 yourself to see all the rules, as you have all the details

[taxu2]

TP purchased the property for 100K.  A solar company has to cross a very small piece of his property to get to the site they are installing the solar panels. They originally offered 25K, but now are offering up to 100K for the easement with an agreed 25 year lease because they have no other way through. I was originally just going to reduce the basis by 25K if the TP ever sold the property, but did not know if it would be the same at the 100K or not and I have no experience in this and was hoping someone could help out. TIA

[sjrcpa]

Did you read the article George linked?

Not an expert, but you can only reduced basis to -0-. If you get more than your basis you have income.

Is it an easement? or is it a lease?

[BobKamman]

"Is it an easement? or is it a lease?"

Could be both.  They may want to rent a portion of the land for placement of equipment needed for the project.  Then they may want a temporary easement over or under the land to run wires.  With $100,000 involved the wording of the agreement is important.  Your client should want to make it look as much like an easement as possible.  Or he may want to be a conservative taxpayer and try to negotiate $4,000 a year so he doesn't get pushed into a higher bracket.  Of course if he sells the land, he loses the future payments.