Just wondering: If you grant a surface right of way or easement for a road and receive a lump payment (pipeline related but no pipeline,):
Is this taxable?
At what rate?
Is it straight income?
Is it similar to royalty income?
Is it considered a 'tax free return of capital'? (If so ,what makes this so?)
Is Tax basis reduced by the amount received in payment?



Tags: of, right, row, taxes, way

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Whether or not the company has the right to condemn makes all the difference in the answer to the question. If I rent your property for whatever reason and you agree, isn't that considered income? A non-eminent domain pipeline company is the same, you can say yes or you can say no. Regardless, it's all income from the use of your property that you readily agreed. On the other hand, a pipeline company that can condemn makes you an offer for a pipeline easement and you say no. They take you to court and you still get a payment. Even if you say yes, it's still under the threat of condemnation. Smarl landowners will request a letter from the company stating that the company has the right of eminent domain and they keep a copy of that letter in their tax files.

Thanks for the info.  On what IRS form did your accountant report the money you received as damages?  I have to file my return tomorrow and it is too late to hire an accountant (a bad case of procrastination on my part).  I have always done my own taxes, although I should have contacted an accountant much earlier this year  I can also file an amended return if I goof. 

My pipeline easement was granted in threat of eminent domain. The company sent me a letter with a deadline saying if I didn't sign by x date, that they would file on me in the local district court. Fortunately I did have a landman representing me and he was able to get a very good price per rod for me.

Hey Texas Gal don't feel like the Lone Ranger on the IRS stuff.

Thanks. I have read so many articles and I have concluded that the easement is the sale of property and a long term capital gain, if held one year or longer, and the damages are not taxable since they reduce your basis. However, if you ever sell your land, you have to deduct the damages portion from your basis and report tax on that amount (example: You bought the land for $50,000 and the pipeline damage amount was $20,000.  Taxes are paid on the amount of the sale, less your basis of $30,000 ($50,000 minus $20,000).

I wish I didn't have to pay taxes on the easement portion, but it just doesn't look like that will fly with the IRS. Such is life, at least all of it isn't taxable!

I also want to add that I am not giving any tax advice, but merely expressing my belief on the tax subject!

If you have the eminent domain letter then you do not have to pay any taxes on the easement. You should pay taxes on the "damages" since damages only apply if you fix the damages. Damages are usually a "rental" for temporary construction workspace. If there are crop damages, then you also owe taxes just like any other crop income. Look at IRS Bulletin 944.

Michael, do you mean IRS Bulletin 544?  The 944 appears to be for employers.

Yes, 544, sorry. It's mentioned on page 6-Condemnations. Examples are more for a road taking, but the principle still applies. They changed this example from a few years ago and that example was for a power line through a farm field which is similar to a pipeline situation. If there is really big money involved a 1031 exchange should be considered..

Thank you, I will check it out.

I was contacted about a possible right of way that an oil company needs to obtain to service an oilfield service company. It stat5es in the letter that they will need a 100' ROW. First of all, why would this need to be so large and secondly, what is the going rate for this acquisition?

Herndon a 100ft row is excessive for a single pipeline. they. Must have want to have other uses in for that much space. When the tiger pipeline came through I was pressured for a100ft row never could get an explanation as o why. Finally it was apparent they had other utilities they wanted to run accross my property. Lawyer up and take them to the bank!
Sorry for the typo's using a cell phone.

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