Dear Tax Talk,
I received a payment for a right of way. The property will come back to me when the gas line stops being used for production. Is the payment for a right of way taxable?
— Jim

Dear Jim,
The answer to your question will depend on how much you are receiving for the use of your property and your basis in the property. The IRS sees it this way: Even though you still own the land, the transaction is going to be treated for tax purposes as a sale or exchange. So what does this mean for you?

It means you will need to calculate your basis in the property, which is your cost plus various adjustments for improvements and other items. If you were given the property as a gift, then your original basis is transferred over from the donor to you. If you inherited the property, then your beginning basis is generally the fair market value at the date of death of the person from whom you inherited it.

The amount you receive for the right of way is treated as a subtraction from your basis. And to the extent you receive more than your basis, that portion would be taxable to you.

If you are able to separate the portion of the property that is allocable to the right of way, you can allocate just a portion of your basis and proceed from there. You can allocate your basis using a percentage of total acreage or other measurements, depending on your particular situation. Be sure and keep good records as you will need to know your basis going forward, when the property is ultimately sold or disposed of in other ways.

Thanks for your question.

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