Taxability of right-of-way proceeds
Tax Talk, To avoid income taxes, can
I put this money in escrow with my attorney and pay building contractors directly
from that escrow account? That way I can avoid reporting it as income and still
be able to fund my expansion project with 100 percent ROW proceeds. It's my cake.
I want to eat it all.
I have a huge lot, from which I can give right of way (ROW)
to my neighbor, whose land is landlocked due to my property. He is willing to
compensate me for ROW to a maximum of $150,000. I want to use this money to fund
my expansion project for my existing dwelling.
When you give another person the right
of way over your property, you have granted an easement. There are two types of
easements. One is that you grant an easement such as to allow a utility to use
part of your property. The other is the outright sale of a portion of your property
in which you do not retain any interest in the land.
first instance you are considered to have been compensated for use of your land
and the amount you receive reduces the cost of your property. For example, if
your property cost you $500,000 and your neighbor gives you $150,000 to use the
entry way for 50 years, you have granted an easement and do not have any gain
to report. Instead, your basis in your land is reduced to $350,000 for purposes
of computing any future gain on the sale of the property.
the second case, you are considered to have sold that portion of the land and
you have to compute a cost associated with the portion sold. That is, you are
considered to have divided your property and sold that portion. For example, if
the ROW represents 10 percent of your property, your cost should be $50,000 (one-tenth
of $500,000) and you would have $100,000 in taxable gain.
either case the use of the proceeds will not affect your taxation. Therefore,
putting the money with the attorney to use for an expansion project does not change
the outcome of its taxation.
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