Tax Questions: Selling part of my land to the county

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Topic Author
NoblesvilleIN
Posts: 122
Joined: Sat Mar 24, 2018 6:04 pm
Location: Noblesville IN

Tax Questions: Selling part of my land to the county

Post by NoblesvilleIN »

These questions are for anyone who has sold part of a parcel to a government entity or an accountant who has helped someone with this type of transaction.

The county highway department has contacted me about buying a strip of land in the front of our property to widen and replace a small bridge. This is not something I'm contesting. Widening the bridge makes sense, I've picked up parts of vehicle mirrors many times where two drivers try to play chicken or fail to heed the narrow bridge sign. I'm guessing that they'll need 1/2 an acre to an acre for this plus another 1/2 an acre of temporary easement during construction.

Question 1: Are the proceeds from selling part of our property taxable income in the year of the sale or does this money just reduce our basis down the road? The answer I want to hear is that this just reduces our basis should we ever sell. The property is paid for - no mortgage. Based on property values, I'm guessing this will be somewhere between 5K and 10K. The price will be determined by an independent appraisal. If I think the offer is too low, I can pay for my own appraisal and they are averaged (I think). I don't intend to contest this as the county has a very deserved reputation for being fair.

Question 2: Is the payment for the temporary easement taxable income in the year of construction? I'm guessing this will be a few hundred at most. They need the use of this land during construction for re-grading the slope to the bridge and re-routing the water flow. I have no problem with this as I think the finished product will be easier to maintain. I currently hang up my mower occasionally when mowing the bank and it looks like this regrading will fix this. I intend to continue to mow the county owned portion - the county mows the ditches a couple of times a summer and I mow what I can get to more frequently.

Question 3: There are a couple of trees (15 year old Norway Spruce) that will have to be cut down. The county is going to compensate me for this, no idea what they are worth from that standpoint. Are those proceeds taxable income? I'm actually thinking of contacting a tree moving service to see if it is viable to have them moved to another spot on my property. I would use those proceeds to offset some of the cost of moving them. The trees were moved to that spot about a dozen years ago to complete a windbreak down our lane. I hate to lose them. The trees need to be removed because there are power lines that have to be moved to accommodate the wider bridge.

Thank you in advance
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Re: Tax Questions: Selling part of my land to the county

Post by psteinx »

I am NOT an accountant, CPA, lawyer, nor the like (but am a guy who has dealt with tough tax situations). Take this for what it's worth.

My guesses:

#1) It's likely a partial sale, not really an alteration in basis. If you owned 10 acres, and were selling 1, and all your land was about equally valuable, then about 1/10 of your land basis would be assigned to this (leaving 9/10 for the residual), and your gain would be sale price, less that (1/10) basis. Of course, that's pretty simplified. The land is likely not of even value, and selling a portion may also affect the remainder disproportionately.

#2) I'd guess money paid for a temporary easement is just income (to you).

#3) I assume what you mean here is that the county will cut down some trees on your remaining property. They do the cutting, but pay you something to offset the fact that nice trees on your property being cut down diminishes your property value. This is a tough call - could be simple income, or something else. IIUC, when a property owner sells timber off their property to a logging company, there are some special rules (depreciation/capital gains/whatnot) that go into effect. This one might require some real research.

Bottom line, you'll probably want to research the topics more thoroughly yourself (IRS publications or the like), or hire a CPA or the like to do your taxes next year.
Mako
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Joined: Wed Feb 28, 2007 9:34 am
Location: MD

Re: Tax Questions: Selling part of my land to the county

Post by Mako »

My understanding is selling a part of your land is a taxable event, and selling an easement just reduces your basis. I sold an easement to the county once and this is my recollection.

This makes sense to me. The former is actually selling some of your stuff. The latter you are keeping all your stuff but it is less valuable as you’ve given away some rights.

No idea on the trees but I’d guess that payment would also reduce basis. Same land, but lost the value of those trees. You didn’t really sell the trees so seems different than selling timber imo.

ETA: mine was a permanent easement, I see yours is temporary. That may change things as once they’re done you haven’t really lost anything. Sounds more like it would be income, but I’ll admit I don’t have a clue.
Topic Author
NoblesvilleIN
Posts: 122
Joined: Sat Mar 24, 2018 6:04 pm
Location: Noblesville IN

Re: Tax Questions: Selling part of my land to the county

Post by NoblesvilleIN »

Mako, part of it is permanent. The county will own it, my deed will change to have that part as an exception. I won't be able to plant any trees in their (county's) part. Another part is temporary and will return to me when they are finished. The two trees that are to be removed (cut down) are in the part that the county is purchasing permanently.

Psteinx, yes, we have several acres and this is a forced sale of part of it. Forced sale is a bit strong, but if I wasn't cooperating, the county could take it under eminent domain.

My understanding is that my deed will change to exclude the part that the county needs permanently and I'll have a bit less acreage going forward.

I am wanting to minimize the taxable income impact because we get a premium tax credit for our health insurance and this could put us over the cliff. I am already planning on not drawing from the tIRA until I have more clarity, just going to use the taxable for now.
Flora
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Joined: Sat Mar 26, 2016 6:19 am

Re: Tax Questions: Selling part of my land to the county

Post by Flora »

Can you refuse to sell to the county? Is this an involuntary conversion?


https://www.irs.gov/businesses/small-bu ... e-tax-tips

"Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home".
SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Tax Questions: Selling part of my land to the county

Post by SGM »

We sold a portion of our farm to the state highway administration for a bypass. The offer was ridiculous. We did not pay for an assessment. Instead we looked at a recent comparable farm sale one mile away and the SHA gave us the same price per acre as the other farm. Since the SHA did not respond six months after an agreed price they also had to pay a 5% penalty fee to us. A lawyer friend told us the 10% per year was the typical penalty. The stupid agent for the SHA said I would get 10% interest daily. Initially the SHA agent was disrespectful, but he became very polite and groveled when I stood up to him. Other administrators in the SHA were incompetent and of course were promoted anyway. We dealt with them over a two year period.

We had to determine the cost of the acreage sold which was difficult for reasons I won't get into. We paid taxes on the capital gain the year of the sale.

I also spoke with the project managing engineer about stopping the project when the SHA was late in paying the penalty. The engineer was on my side and called the SHA to demand that they make the payment promptly. The SHA called me back within an hour of the engineer's call and an administrator came to my house with a check two days later.

Without my asking the engineering company put a large sign near the entrance of our drive to stop trucks from using our entrance for a turn around.
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