Advice shared for preparing easement taxes
In a recent Agriculture Today podcast, dated Oct. 27, Roger McEowen, a professor of agricultural law and taxation at Washburn University School of Law, shares his knowledge on easement agreements between landowners, various industries and agencies.
During the podcast, he discusses how landowners can file easement payments on taxes.
Types of easements
Easement payments can come from utility, pipeline and energy companies requiring access to land, according to McEowen. He notes, it is a common practice in agriculture.
“Land is the number one asset for farmers and ranchers, and of course for anyone that lives in the country who is not a farmer,” says McEowen.
For example, any time an energy company requires access to a private property, they are required to compensate the landowner for access, McEowen explains. This raises the question: How should payments be characterized on the tax form?
Characterization of payments
According to McEowen, there are two main characterizations for easements – sales and leases.
“The way landowners determine whether it’s a sale or a lease is by looking at the property rights retained by the owner,” says McEowen. “If the landowner has no property rights left after granting easement and access rights to the company or agency requesting access, this is considered a sale of the land.”
To help determine this answer, McEowen asks, “Is it bisecting the property or running down a fence line? Is it obtrusive such as a buried pipeline or a wire line, which cuts right through a property and affects the way landowners use the property?”
One of the issues is determining where the easement is located. McEowen notes, “This will be a determining factor in how the payment will be recorded on a tax return.”
When filing taxes, the first step is to determine how a payment will be recorded, but understanding landowner rights will be the starting point.
“If the landowner is retaining a lot of the rights to their property, more than just having a legal title held in their name, then the grant of an easement constitutes a rent for land use,” McEowen says. “This characterization of payment would be considered a lease payment.”
Lease payments are commonly classified under Schedule E on a tax return, which is used to report income or loss. According to McEowen, the characterizations of payments are classified as an ordinary income if it’s a lease or capital gain if it’s a sale.
Special considerations
Landowners can receive payments for all kinds easement agreements, and there may be special considerations.
In some circumstances, a company may request an easement where crops or land are affected. The company may pay an amount in advance for any damage, and if the property owner accepts, no further payments may be made, McEowen explains.
Property owners are cautioned when accepting easement proposals.
“For damaged crops, easement payments are treated as a sale of crop and will be filed in a certain place on a tax return,” McEowen says. “All easement payments have certain characterizations that help landowners determine where to report the payment on the return.”
In order to do so, they have to sort through both the character and type of the payment.
Temporary easements
In addition, temporary easements can be classified as rental income and there is a separate designation, according to McEowen.
A comprehensive tax allocation is a tool that can be used to determine tax classification.
“If a landowner receives a payment from the government to use a portion of a property to put in an expanded road or a park, property owners might be able to use involuntary conversion rules to defer the recognition of that payment until a replacement property is found,” McEowen says. “The whole point is, these payments happen often. Landowners have to characterize them properly, and it has to be broken down by type of payment.”
Proper classification is important to avoid concerns with the Internal Revenue Service, McEowen warns.
Tax advisor assistance
“Seeking good tax council can help produce the best result possible when landowners are dealing with various types of payments to be received, because in some instances the rules are unique, shares McEowen. “The type of payment will determine the rules and those rules vary in accordance with the type of payment and the overall character of the transaction.”
McEowen concludes by sharing it is important to properly characterize transactions in order for taxes to be filled correctly. Landowners are encouraged to seek tax council assistance and provide necessary documentation.
Brittany Gunn is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.
