The recent oil and gas drilling boom in southeastern Ohio, Pennsylvania and West Virginia has brought about an unexpected visitor for many landowners, including some far removed from where shale wells are being drilled—pipelines. Pipeline companies are acquiring easements (also called rights of way) from landowners in order to construct transportation pipelines. They may be acquired through negotiation between the pipeline company or (under certain circumstances) eminent domain (condemnation) proceedings. If you are considering a potential pipeline easement offer, make sure you consult your attorney and tax professional before you sign! Proper planning and negotiation with the pipeline company can minimize and possibly defer the tax generated by the sale of the easement.
Payments for pipeline easements can be categorized in different ways. Different categorizations can have different tax consequences to the landowner. Whether the easement payment qualifies as a capital gain or ordinary income depends upon whether the pipeline company obtains a permanent easement or a temporary right to use the land. The maximum capital gains tax rate for an individual is generally lower than the maximum ordinary income tax rate. Temporary work space payments and payments for lost profits (such as crops) generally are taxed as ordinary income. Under certain circumstances, a permanent easement payment may qualify as capital gain income. (A landowner generally is allowed only to offset the proceeds from the sale of a permanent easement against the landowner’s cost basis in the easement tract. In limited circumstances, the proceeds of the easement payment may be applied to reduce the aggregate basis in both the easement tract and the landowner’s remaining property.)Read the whole article by clicking here.
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