Question

How do I reduce the basis on some farm land for a RR Crossing Easement

Forum|Forum|5 years ago
January 24, 2021
1 reply
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I surrendered to the railroad an access easement for a railroad crossing they wanted to remove for value received. It was for about the cost to build a new road to the property. However, I have land adjoining it that I may just grant an easement across if I should decide to sell it independent of my original farm. How do I adjust the basis of the land for this partial sale e.g. part of the original access easement that ran with the land. I am pretty sure it is not taxable since it is less than my basis in the land. I still have the land so do not believe that the basis for the easement was the entire purchase price. If I get an appraiser to develop the value of the land with and without the easement and find that the amount received when costs of the lawyer and appraiser was less than the difference, can I take a loss or is the land basis just reduced by the amount of proceeds less those expenses. Which form on Turbo Tax do I show that?

TurboTax Home & Biz Windows

J

JamesG1

See the IRS qualifications below but, generally, the amount received for granting an easement is subtracted from the basis of the property. The transaction is reported as a sale of property and listed on Schedule D.

The land basis would be reduced. Sales costs would reduce the net proceeds. As an example,

Land Basis $50,000

Payment $11,000

Sales costs $1,000

Payment $11,000 less $1,000 = $10,000

Adjusted Basis $50,000 less $10,000 = $40,000

Report the transaction under sale of second home. Choose land as your option and report the basis of the land equal to the payment.

In the upper right hand corner of the screen, click on the magnifying glass Search. Enter sale of second home.
Click on Jump to sale of second home.
At the screen Did you sell stocks, mutual funds… in 2020? Click Yes.
Under type of investment click Other.

See this TurboTax Help.

See IRS Publication 544 Sales and Other Dispositions of Assets. Click down the left side under Easement.

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.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

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M

MarcsyPEAuthor

James, Thank you very much for your response. Only thing is it is we actually had to surrender the easement as the railroad wanted to eliminate the crossing. We got paid an amount to give it up. It was not really voluntary but we finally agreed to do it for consideration. It creates a liability for me in the I will have to either run a new road to a public road to ever sell the land or cross my existing farm and grant an easement to the property across my existing property which adjoins it to sell it independently. Alternatively I can just add it to my existing property and just treat it as one property once that tract is paid off. I am getting an appraiser to calculate for me the impact of those options and was considering that to be the basis in the land of the easement. Then if the value received is less than that do I get to take a LT capital loss, or does it still just affect the basis?

J

JamesG1

I had a feeling that your situation did not fit into a neat box. After your explanation, please review these circumstances from other parts of the IRS Publication 544 Sales and other Dispositions of Assets.

Click down the left side of the page and click on Easements and Gain or Loss From Condemnations.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property.

And

You are considered to have made a forced sale, even though you keep the legal title.

And

If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award.

And

If your net condemnation award is less than your adjusted basis, you have a loss. If your loss is from property you held for personal use, you cannot deduct it.

It sounds like your situation may allow you to consider the transaction a forced sale and/or condemnation sale and you may be able to claim a long-term capital loss.

IRS Publication 544 Sales and other Dispositions of Assets.

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.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property.

However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. See Gain or Loss From Condemnations, later.

Gain or Loss From Condemnations

If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award.

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