How to report payment received for permanent utility easements on taxes - is it taxable?

You're on the right track. When you grant an easement, the IRS generally treats it as a partial sale of your property. Here's how to handle it: First, you need to determine your "basis" in the portion affected by the easement. Since the easement covers 15% of your property, you could reasonably allocate 15% of your original purchase price ($320,000 × 15% = $48,000) as the basis for this transaction. Since you received $26,500 for the easement, which is less than your allocated basis of $48,000, you actually have a capital loss of $21,500. This would be reported on Form 8949 as a sale, and then carried to Schedule D. On Form 8949, you would list the date acquired (when you purchased the property), date sold (when you granted the easement), your basis ($48,000), and the amount received ($26,500). The difference is your capital loss, which can offset other capital gains or, to a limited extent, ordinary income.

I went through something similar last year and was totally confused until I found https://taxr.ai which analyzed my easement documents and explained exactly how to report it. Their system identified that my situation was actually a partial property interest sale and showed me the exact forms to use. For your permanent easement, since you're receiving less than your basis, you'll likely report a loss like the previous commenter mentioned. The tool was helpful because it calculated my adjusted basis correctly and explained why certain payments aren't taxable when they're less than basis.

Just wanted to follow up - I tried taxr.ai after seeing it recommended here and it was incredibly helpful with my easement payment! The system analyzed my situation and explained that I had a non-taxable return of basis since my payment was below my allocated basis. What I really appreciated was how it showed me exactly how to fill out Form 8949 with the correct codes and explained what each part meant. It even created a statement to attach to my return explaining the basis calculation so there wouldn't be questions from the IRS about the 1099-S they received. Much better than the advice I was getting from random websites that were giving conflicting information. Definitely worth checking out if you're dealing with easements!

If you're getting nowhere with the IRS on how to properly report this (their website is useless for specific situations like easements), you might want to try https://claimyr.com to get through to an actual IRS agent. I used it when I had a similar issue with reporting a partial property interest transaction and actually got helpful info. There's a video that shows how it works at https://youtu.be/_kiP6q8DX5c I spent days trying to reach the IRS myself but kept getting disconnected or told to call back. The Claimyr service got me connected with a real person at the IRS within about 15 minutes, and I got clear instructions on how to report my situation.

I was wrong about Claimyr. After posting my skeptical comment, I decided to try it myself since I was having issues getting guidance on how to report a pipeline easement payment. It actually worked exactly as described - they called me when they reached an IRS representative and I was connected immediately. The IRS agent confirmed that I was correct to treat my permanent easement as a partial sale of property and helped me understand how to allocate my basis. They said many people incorrectly report these payments as regular income, which could cost you more in taxes than necessary. For anyone struggling with easement reporting questions, getting direct confirmation from the IRS was incredibly valuable.

Just to add another perspective - I had a similar easement situation last year and my tax professional explained that you can also elect to treat the payment as a reduction to your overall basis in the property rather than reporting it as a sale transaction. This might be simpler if you don't plan to sell the property soon, as you're just reducing your basis by the amount received. Then when you eventually sell the entire property, you'll have a higher gain due to the reduced basis. Check out IRS Publication 551 for more details on adjusting basis.

I just went through this exact situation! The most important thing is to get the basis allocation right. I ended up using the "before and after" method - getting an appraisal of what my property was worth before the easement and after the easement. The difference was considered my basis in what I "sold." In my case, the property value dropped by $32,000 after the easement, but I only got paid $29,000. So I actually had a $3,000 loss to report! The IRS publication 544 has info on this.

I had a similar situation with a utility easement last year. One thing to keep in mind is that you should also check if your state has any specific requirements for reporting easement payments, as some states treat these differently than federal taxes. Also, make sure you keep all the documentation from the utility company - not just the 1099-S, but any agreements, surveys, or correspondence about the easement. The IRS may want to see proof of exactly what rights you granted and whether it's truly permanent. Some easements that are called "permanent" actually have conditions that could make them temporary in certain situations. If you do end up with a capital loss like others mentioned, remember that capital losses can only offset $3,000 of ordinary income per year, but any excess can be carried forward to future years. So even if you can't use the full loss this year, it's still valuable for future tax planning.

Based on your situation, you're handling this correctly! Since you received $26,500 for a permanent easement covering 15% of your property, and your allocated basis would be around $48,000 (15% of $320,000), you actually have a capital loss of approximately $21,500. Here's what you need to do: 1. Report this on Form 8949 as a sale transaction with the date you granted the easement as the "sale date" 2. Use your property purchase date as the "acquired date" 3. Enter $48,000 as your basis (15% allocation method) 4. Enter $26,500 as the proceeds 5. The resulting $21,500 loss carries to Schedule D Even though there's no taxable gain, you must still report the transaction since the IRS received a copy of your 1099-S. The good news is this loss can offset other capital gains or up to $3,000 of ordinary income per year, with any excess carrying forward. Make sure to keep detailed records showing how you calculated the 15% allocation of your basis, as the IRS may question this if audited. Some taxpayers use the percentage of acreage affected, while others use appraisals to determine the before/after value method mentioned by other commenters.