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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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<< 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. >>

I haven't read Pub 544 and admit that logic doesn't always (some would say frequently) prevail in the tax law, but this doesn't make sense to me. Reducing your basis by the amount received for the easement would. Are you sure you read it right?

Phil Marti
Tax Preparer
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You're right ... I apologize ... the $975 is supposed to be subtracted from our original cost basis of $101,500 so that if and when we sell our property/house, our new cost basis would be $100,525.

My real problem ... am I interpreting this correctly? Do I not have to show this $975 anywhere on my tax return? I do not want to "red flag" the IRS by omitting it if I'm supposed to be putting it in the Schedule D as an "easement" with a cost basis of $975, gross sales proceeds of $975, therefore zeroing out with an end result of no capital gain or no capital loss, but ... remembering that we're responsible for reducing the cost basis our our property/home by the $975 if and when we sell it.

I'm sorry if I'm not being too clear about this, but I find it very confusing and just want to make sure I do the right thing. Because we received the 1099-S for the $975 I don't know if that means that it must be shown somewhere in our tax return when we file for 1999 or whether or not the IRS knows it was for an "easement" and won't be expecting it to show up on our return?

I've tried to call 1-800-829-1040 for tax assistance, but they want me to leave a telephone number which is not possible because I'm at work and the phone is usually tied up so I'm desperately trying to find the answer elsewhere.

Any help you can give me would be greatly appreciated. Thanks!!
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<< My real problem ... am I interpreting this correctly? Do I not have to show this $975 anywhere on my tax return? I do not want to "red flag" the IRS by omitting it if I'm supposed to be putting it in the Schedule D as an "easement" with a cost basis of $975, gross sales proceeds of $975, therefore zeroing out with an end result of no capital gain or no capital loss, but ... remembering that we're responsible for reducing the cost basis our our property/home by the $975 if and when we sell it.

I'm sorry if I'm not being too clear about this, but I find it very confusing and just want to make sure I do the right thing. Because we received the 1099-S for the $975 I don't know if that means that it must be shown somewhere in our tax return when we file for 1999 or whether or not the IRS knows it was for an "easement" and won't be expecting it to show up on our return? >>

I've looked over the 1040 Schedule D instructions and can't find anything on point. I assume you've done the same in the Pub.

There is a reference in the Schedule D instructions to the receipt of a 1099-S for a sale of personal-use property which results in a loss. It says you must show the transaction on the Schedule D even though the loss is not deductible. Extrapolating from that instruction, I think your idea of reporting the payment with an equal basis is a good one. It accounts for the 1099-S but doesn't affect your tax liability, which we agree it shouldn't.

Phil Marti
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