Easements...how they are characterized makes a big difference at tax time...capital gain treatment

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Making money from a pipeline easement is great. Keeping the money is more important and making sure you don't overpay taxes is a critical part of keeping your money.

Regretably, many easements are negotiated and fail to consider that if handled properly, the easement payments can be largely characterized as capital gains instead of ordinary income.

The IRS will consider a pipeline easement of 30 or more years in durtation as a "permanent" easement and generally afford it capital gain treatment. Almost always, landowners can secure long term treament as they have held the property for more than one year.

But the devil is in the details so be sure to attribute payment to the actual permanent easement. Otherwise, you might unwittingly be forced to claim income as "ordinary" and thus subject to higher tax rates than if you had attributed it so you could secure the lower capital gain rates.

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Steven, some great info. Maybe you can assist with anther tax saving item with easement.

You sign you easement and when they exercise the agreement, you get a lump sum payment upfront. The payment includes the cost to cover damages. My understanding is that the easement payment is taxable, while the damage payment is to recover lost resources is not taxable.

Since I am getting paid today and the company is issue a 1099 for the lump sum, but, the pipeline / damages to the land will not be incurred until the next year or two, when the company puts in the pipeline. How do you go about claiming damages? Can you use and estimated damages? Is there a guideline for % of easement payment can be claimed as damages?

Any insight you can provide would be greatly appreciated.

Thank You

jme