Hey folks, you know I don't usually cross-post from my Death and Taxes group, but I thought this might be useful to this forum. So here goes:
Getting a lot of last minute people coming in with lease payments and seperate payments for damages on Right-of-ways. The money you get that is specifically identified as damages is treated differently then other lease or royalty money.
If the money is for permanent damages (i.e. loss of use of timber land, etc) then the money you receive is NOT taxable. It reduces your basis (your investment) in the total value of the property.
If the money is for both permanent and temporary damages to your property then it must be prorated out and the temporary damage income is taxable. An example of this would be if you own pasture land and are not able to use it for grazing one year because they are building a pipeline through it. Obviously at least some of the land will be useable as pastureland again, once the construction is done, and some (where the actual pipeline and access roads are) will not. In this case whatever is determined to be temporary damage income would be treated just as if the company were renting your pasture for that time period and the income from the permanent loss of use of the land would reduce the basis in the land.
Clear as mud?
Seriously, if you received income from right-of-way damages consult your lawyer or tax professional to make sure you have the divisions down correctly from the outset. It could be really important later on if more income is forthcoming from this property.
When you sign the agreement for the payments it should state how much is for damages. It's up to you to decide what is permanent and what is temporary. It's also going to up to you to be able to lay out a reasonable, well documented, argument for why you split the figures the way you did if the IRS ever asks.
It may seem like a no-brainer to just reduce the basis of the property with as much of the income as possible, but if that property is going to get more income later you can only reduce the basis to $0. Once you reach $0 in basis for the property, everything you get for any reason on that property is taxable. So people need to think long-term.
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More