I know this has been discussed before but here I couldnt find it. What type of income is payment for a pipeline ROW. ROW is pretty much forever unless they stop flowing gas for more than a year.most likely at least 50-75 years ,my lifetime and probably my kids.
Is it ordinary ,rental or capital gains?
I found the article from penn state that says its capital gains. I have talked to 3 CPAs today and got dif. answers. Can anyone confirm? Below is a copy and paste of the penn state article.Thanks
Taxation on Pipeline Easement Payments
Landowners should be aware that income received for the easement creates tax payment obligations. For federal taxation purposes, income for an easement that lasts thirty years or more is considered a capital gain and must be reported as such. Income received for a “temporary” easement, one that lasts less than thirty years (such as a construction easement), is considered ordinary income for tax reporting purposes. Payment for damages to the landowner’s property is considered capital gain. Because of these distinctions, it is important for the landowner to obtain a statement from the company that itemizes and explains the payments made to the landowner.
The Importance of Professional Assistance
This fact sheet should not be used to replace the services of an attorney or other professional. We strongly encourage landowners to consult with an experienced attorney and other advisors when considering and negotiating a pipeline easement.
Natural Gas Pipeline Right-of-Ways: Understanding Landowner Rights and Options; Penn State Extension (Apr., 2010).
Taxed as earned income, same as lease bonus, amounts are added to your regular income you earn at your job then subtract all your deductions and that is your tax bracket. . . . royalties are a whole different animal
I was told by our CPA that any funds received for damages would be considered ordinary income unless you could prove the devaluation of property with two appraisals pre-ROW and post-ROW. I will know more by mid 2014 if i get a visit from the IRS.
Thanks for the input . I just dont understand why its not black or white as to what kind of income it is. I posted the article I found above and if you google it you will find others that support it but also as many that claim its ordinary income.
My CPA says its ordinary income but my fear is he doesnt know for sure and doesnt seem interested in learning or researching.He keeps calling it marcellus royalty money . I keep trying to explain this is a ROW on my property forever or at least 50-75 years or more.I cant build on it ,grow trees on it ,but I get to pay taxes on it .Its not a mineral lease or royalty money.
I called another local CPA who I think is a little more knolegable in this area because he owns property that is getting a ROW and he says its capital gains. I am meeting with him next week.
I'm ok either way I just want to get it right.
You are so right. There's been so many pipeline ROW's put in lately that it should be common knowledge now about how it is taxed. CPA s should know; whether or not they are "up" on oil&gas stuff! Don't know how you could get conflicting answers. It"s tax time,so they better be finding out real soon!
It's taxed as ordinary income not capital gains. Selling real estate or mineral rights is capital gains. Although you can deduct some of that income for damages
That"s where it will get tricky, "damages". They seem ,so far, to be leaving the property in better shape than they found it,after all the grading & seeding. BUT; what about the fact that you can never build on it? what about the timber they cut down? Has the property value gone down? Damages may be more than most think,It will be interesting to see how can it all be deducted, if it can?
To make it simpler: In your ROW agreement there should be two payments; one for the signing bonus, one for damages. It's my understanding that only the signing bonus is taxable.
As Mark notes; two payments is standard (can be one check though); one piece it the taxable signing bonus amount and the other piece is a 2nd amount for damages which is not taxable. If you have received ROW payment recently; the 1099 statement clearly depicts it in exactly this manner; a taxable portion and a non-taxable portion. This should apply to all states since we are talking Federal taxes/reporting, 1099's.
my lease is broken down as you mention.The first part is the pipe per inch/ft total. then there is another part listed as damages.
I also have a temporary "staging area" portion of the lease which according to the above mentioned article is ordinary income. cant wait to meet with this other CPA next week.Would love to see something in writing.
Please let us know what they say. Can be a big diff between cap gains and income tax percentage wise.