JD--- agree 100%---- I have 5 pipelines ROW 3 in Nacogdoches and 2 in Shelby County over last 12 years and my CPA reported primarily as damage, so NO current tax liability was due and IRS has never questioned them. I don't think I even reported the deduction (form 4797 or showed on Sch.D) in basis on return just a internal calculation of decrease in cost basis for future if surface land is ever sold. On review of return-- correction it was report as decrease in basis to offset the 1099 so return balance all 1099s reported to the IRS. No Tax Paid on ROW Income. Same on Drill Pad Site ROW Damage.
Just hope you don't get audited or hide a good deal of anticipated tax dollars. There's no way you can prove damages. Look at IRS Publication 544 and you will learn about eminent domain and no taxes, but you are making income off of your property by letting a pipeline cross your property without having eminent domain. Why? Because in the end, you can tell them to go around you and put the pipeline on someone else and they will have to find a new route. Under eminent domain, you do not have a choice, so for the easement itself, no tax. Get another CPA or have them guarentee the IRS won't charge you taxes plus penalty and interest. I've seen it too many times. The land agent should have a calculation sheet with all of the dollars spread showing value for the easement, value for the temporary workspace, value for crops, staging areas, truck turn-arounds, storage areas, bore sites, etc. You need that for your taxes, if not, then ask for it.
Micheal--- I have been audited in past during just routine audit due to Passive type investments with income and that year I had a ROW income and it was not a problem to the IRS then ( year 2002). It was taken as reduction in cost base of land ( Records accounting kept by my CPA for future) so tax simple deferred until and if I sell land one day and will be Capital gain rather than Ordinary tax rate. I paid no tax on about 20K income on a pipeline ROW. I am sure if IRS thought I owed money I would have been hit then on the Audit that occurred in year 2004 for my 2002 return. If it one day is passed to Heirs on my death it will go with base reset to market value on that date. (Of course value calculated in value of Estate for any Estate Tax that may be due) So you go ahead and pay the tax now if you chose.
The question is whether or not the pipeline company could condemn you or if you had a choice. That's the question. If the pipeline company had eminent domain power, then you and your CPA and the IRS are 100% correct. Who was the pipeline company and what are they carrying through the pipe?
Michael---- I notice you said you negotiated ROW for many years so not a argument about your knowledge ; but The question and my answer has nothing to do with where the company could take ROW under eminent domain or condemn the property it was a simple answer to "how do you report the income receive for the ROW for a road" or whatever the ROW is for on your tax return and my answer is simply as I stated and I agree with the CPA posted answer. This is my experience only and is not Legal or Accounting advise-- each person should handle the way their CPA or Tax Attorney advises--- I sign off this thread now-- talk again one day other subject---- Have good day to you all.