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In 1999 we were approached by the City of Charlotte because they needed to buy an easement on our property for a sewage line. We received $4,025 for damages (trees cut down, property depreciation, etc.) and $975 for the actual easement. We still own the property and still pay the property taxes. The City of Charlotte reported the $975 to the IRS and we received a 1099-S showing that amount as gross sales proceeds.

I've read page 2 (Easements) of Pub 544 and it states that easements are usually not treated as sales of property, but that the amount received for the easement should be added to the cost basis of that portion of the property or if it's not possible or practical to determine a separate cost basis for the easement section, then it should be added to the cost basis for the entire property. In otherwords, when we bought our house and property we paid $101,500 and now that the city has paid for an easement on only a section of that property we have to add the $975 to our original cost basis of $101,500 so that if and when we sell our home and property our new cost basis would be $102,475.

So ... if I interpreted the above information correctly, then I'm assuming that I do not need to list this sale on Schedule D and that it's absence will not raise a red flag to the IRS because the City of Charlotte also informed them that this sale was actually for an easement?

Thanks in advance for any help you can give me!!
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