County bought part of land for road

[Kea]

Just to make sure I'm not missing something.

New client owns 3 acres of land where they live. County purchased 0.5 acre to widen roadway. This sounds like an outright sale to me (I have not yet seen her documents). So I should just get original purchase price and figure out some kind of proration to determine basis, right?

I know I've read here about decreasing basis when payments are received for easements. But I don't think that applies here.

If county paid her & that land is now a road, there is no way the client still owns this in any way (OK, maybe a tiny percentage as a taxpayer of the county, but that's a different issue). That's why I think I should show a sale on Sch D rather than just reducing the basis.

Sound right?

. I'm ready for 4/19.)

[kcjenkins]

Just because she got paid does not change the fact that what she sold was an easement, and that allows for special treatment of the sale. She could report it on Sch D as a sale, if for some strange reason she wanted to pay tax on it now. But she could instead just reduce the basis by the amount of the easement payment. No taxable event this year. Especially if this is her home, which if/when she sells it, she can exclude gain on it, lowering basis is a smart choice.

Pub 551 has a good explanation of basis and the effect of granting an easement.

[Kea]

Thanks KC. I knew (courtesy of this board) there were special treatments for easements. I just didn't think this would qualify.

Glad I asked & thanks for the answer!

And thanks for fixing my typing.

[kcjenkins]

You're welcome. Glad to help.

[mcb39]

You're welcome. Glad to help.

I am sure glad that came up because I have one of these coming up for 2011. My client has the rest of his property for sale and hopes to sell it all this year.......but, just in case.

[Kea]

I always enjoy it when a question is answered before I ask it.

Or, when like this, it makes me realize I should ask a question.

[jainen]

>>what she sold was an easement<<

I disagree. An easement is the right to use somebody else's land. Sometimes roads are built with that arrangement, but in this case the state actually took title to a half acre. When you split a lot and sell off the new division, that is NOT an easement. It is as Kea suspected an outright sale. The taxpayer will need to allocate basis to the strip that was sold, and calculate gain or loss accordingly. Most likely this will be simply by size, unless they can document that at the time of original purchase the strip had a disproportionate share of market value.

[Kea]

Well, I won't be able to do a simple ratio. There was a house on it from the beginning & they still live in it.

I'll have to find some other way to proportion it out - if it was an outright sale.

What should I look for in the documents to determine whether it is a sale or use of easement?

Thanks

[jainen]

>>What should I look for in the documents <<

Look at the deed. Did it grant an easement or not?

If this were a rental house, you would have to calculate and subtract land value for depreciation, right? From there it is a simple matter to allocate a percentage of the land value to the strip.

[Kea]

Thanks.

[Kea]

But if it is an outright sale of a portion of their home, wouldn't the $500K (MFJ) exclusion still apply? The eventual sale of the home & land (if they ever sell) would have to be modified by this sale.

In this case, would I need to list it on the Schedule D with the section 121 exclusion or would I leave it off completely as I would if the whole property had been sold?

Thanks

[jainen]

>>wouldn't the $500K (MFJ) exclusion still apply?<<

Potentially yes, but ONLY if the rest of the property including the principal residence were sold within two years.

[Kea]

But regardless of which section is sold, it was a parcel they owned and lived in (on) for 3 of the past 5 years. So, why would they have to sell the rest in a 2 year period? As long as they don't exceed the $500K cap for the whole sale (not much of an issue in this area).

[mcb39]

But regardless of which section is sold, it was a parcel they owned and lived in (on) for 3 of the past 5 years. So, why would they have to sell the rest in a 2 year period? As long as they don't exceed the $500K cap for the whole sale (not much of an issue in this area).

The two year clause is written into the law. I agree with you Kea, especially in a case like this where the taxpayer is "forced" to sell. My client is hoping to sell the remainder of his property within the two year period and hopefully sooner.

[Kea]

So, do I have this straight now?

IF the county bought an easement only, there is no current tax consequence. Just reduce basis for final sale

IF the county actually took title to part of the land & client sells remainder of land & house within 2 years, there is no tax consequence. Just report on Schedule D & use Section 121 exclusion. Do the same for the final sale.

IF the county actually took title to part of the land & client does not sell reminder of land & house within 2 years, they have to pay capital gains on the sale (with proration of basis).

[mcb39]

That is the way that I understand it. Not that I think it is right, but I am finding fewer things every day that I find right with tax law.

[Kea]

Yeah, I started to add that comment, too. But IRS doesn't always agree with "logic" and / or "right." Although, I do sometimes tell my clients that the IRS does follow a certain logic (all their own).