An easement is the right of someone else to use your property. It could be the water company running a pipe under your garden, the city using part of your yard for a sidewalk or someone taking a shortcut across your yard. If you get money for easement rights, it's usually taxable income.
Easements often don't involve money. If, say, you tell your friend he's free to sit or walk on your beach, that's an easement, but there's no taxable income involved. If money does change hands, it could be for a temporary easement -- access to a work site when someone's laying pipe -- or a permanent grant to use the property. If the government goes to court and forces you to accept an easement, the payments are taxable even though you objected to the deal.
Payment and Tax
If you allow a temporary easement, even one that runs for several years, that usually counts as rental income and is taxed at the same rate as regular income. A permanent easement on your property is capital gains income. If you've owned the property for more than a year, you pay the long-term capital gains rate, which is often lower than conventional income-tax rates. To figure the gain, you have to figure the value of your land, then determine the value of the specific square footage taken by the easement.
Conservation easements are contracts not to develop your property. For example, if you own a farm, you can sell or donate an easement that says you can keep farming the land but you won't build on it. If you donate the easement and it meets the federal requirements you can take a charitable donation tax write-off for the loss of land value. This also lowers the value of the land when figuring estate taxes and may reduce your property taxes.
Whoever is paying for the easement will send you a Form 1099 at the end of the year. If you get a 1099-MISC for rental payments, you report the income on Schedule E. For a permanent easement, you get a 1099-S and use Schedule D to report capital gains. If your calculations on the value of the easement land show you have a capital loss, you don't have to report the income, but you should still keep records of the payments you received.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.