You negotiate your contract for a ROW and pipeline to cross your land. The land agent tells you that the money you receive can be considered payment for damages. The document from the midstream company lists the payment as damages. Tax time arrives....how do you proceed? The midstream company sent you a 1099-misc showing the amount they reported to the IRS. The confusion soon follows. Is this money taxable or not? Ask 5 "tax professionals" and you'll get 5 different answers.

Is there such a thing as damages. Tell your accountant or local H&R Block tax person that these damages aren't taxable and they'll look at you like you're crazy.

Let's settle this once and for all. Let's hear your comments. Are damages taxable???

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In past years, I've received payment for damages from the power company, AEP and also from NiSource (Columbia Gas Transmission). This money was paid to me as "damages" and it ended there. There was no 1099-misc involved. There was no explaining to the tax people. AEP and NiSource go strictly "by the book". If these huge companies pay for damages and they know it's not taxable....why do the tax people freak out when landowners try to claim damages for pipelines?

The rep. I dealt with from AEP was literally shocked to hear that the O&G / midstream companies pay for damages, but then they report these damages to the IRS and leave it up to the landowner to get it all sorted out. She was in utter disbelief.

I can't remember all the details but my tax guy said you don't want to claim damages. I forget why. He is a brilliant tax guy and I can't remember he said that but it made sense at the time

Well if your tax guy said you don't want to claim damages then that answers my question. The damages are taxable. Yes, there are many who slipped through the cracks and their tax preparer deducted damages from their income, but I'm sure that was wrong. I myself, feel that damages (as stated in your documents) should not be taxable, but we all have to remember, "Uncle Sam" always wants his share of the cut. "Uncle Sam" has his hand out and waiting even before the ink dries on your royalty checks. 

What I learned in my income tax class back in law school was that all income is taxable until proven otherwise.  So from that stance even damages should be taxable.  However....

Damages are paid to make you whole, in other words, to put you back into the position you started in before the activity took place.  Put another way, they're for restoring your property to it's previous state.  Since damages are just putting you back into the position you started in they are not considered to be income.  The trick is to prove that the damages were reasonable.  If it's determined that they were unreasonable then the IRS will adjust the amount of damages to what they think they should be.  Usually damages are inflated, but if they are under-estimated the IRS could technically adjust them up and owe you money.  Those are the basic principles as I understand them.  The actual code could vary some year to year and the application to any given situation could vary.

I don't get it. Why would you try to claim damages done to your property when you have already been paid for the damages?  If someone runs into my mailbox,stops and pays me $200. for damages,how can I claim the damages? Doesn't there have to be a provable monetary loss? I suppose if they paid me $200. and it costs $250. for new one,I could claim a $50. loss?  What if it only took $80. to buy a new one? I would then owe tax on$120.?  as far as ROWs, they paid for damages that could not be known for decades. Seems it would be hard to estimate the $ amount for losses/damages. That's why the IRS may not even want to hear about it.

You get paid for damages. It should end there. My money should not be taxed (my opinion). If there is no such thing as damages, then the O&G people should stop using the term. Damages sound good....until tax time rolls around.

The way it was explained to me was you can't claim more damages then what the property is worth

Some of this land is worth millions now with the oil, gas and pipelines. You can't use what you originally paid for the property as your "cost basis" because it wouldn't apply.

I hope the county tax appraisers don't think that way,we may have to move out!

Zack,

       irs.gov has a search engine for answering questions and providing directions & forms required.

I searched on Pipeline Right Of Ways and found the following at this location:

NOTE: Just one more thing, the IRS uses the word "Generally" everywhere. Be careful when you use any "Generally" information/directions. For example: Generally a 401K Roll Over can take place if the owner receives the money then rolls the money into an IRA within 60 Days of receipt from the 401K. 

OK, so I have some 61 day old money, generally I'll just roll that into an IRA. But wait, the background information for Generally in this case is, Specifically, the only way you can roll over >60 day money is if the bank made an error which delayed the money beyond 60 days. A few years after making the error you will be charged 20% on any amount over $5,000. The IRS doesn't move their penalties with the Prime Interest Rate, so while you make 0.03% on the error you made, you pay a 20% APR penalty. GENERALLY can = Specifically when used by the IRS. Misleading? You bet it is.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed...

Easements and Rights-Of-Way

Income received by farmers to grant easements or rights-of-way on their property for flooding land, laying pipelines, or constructing electric and telephone lines, etc., may result in income, a reduction of all or part of the basis of the property, or both.

Example 5

Fred Falls sold a right-of-way for a gas pipeline through his property for $1,000. Only a specific part of his farmland was affected. He reserved the right to continue farming the surface land after the pipe was laid.

  1. If the $1,000 received for the right-of-way is less than the basis of the property allocated to the portion of land affected by the right-of-way, then the basis is reduced by $1,000.
  2. If the amount received is more than the basis of the affected portion of the land, the excess is gain from the sale of IRC section 1231 property.
  3. If, instead of selling a right-of-way, he sold part of his land, he would have a gain or loss from the sale of IRC section 1231 property.
  4. If during construction of the line, growing crops were damaged and he later received a settlement of $250 for this damage, then the $250 he received in damages is income. This income is reported on Schedule F just as the crop sale would be.

Easements and rights-of-way will normally be split between permanent damages and crop damages. There should be a signed document indicating the amount of permanent damages and the amount of crop damages.

When you get a 1099 it is income reported to the IRS & it becomes taxable income. That's why the tax preparer will look at you like your nuts when you say the money was for damages. You can choose not to claim it and you can expect to get audited by the IRS for not claiming reported income. Now with that said. Depending on how you file your taxes... You should be able to deduct the losses/damages on your tax returns. This is where you itemize on your tax return. I'm no accountant, I can only share what I was told.

Hopefully,someone who went thru this with the accountants and IRS in previous years,will post on this thread and tell us what went down.  I can see them wanting some proof of damages. You may need an appraisal of what the property is now worth with a pipeline running thru it,opposed to what it was worth without it. What if it had,or will have had, marketable timber on it? Who is gonna give you a written estimate of the value? A forester? That's where it would get to be a pain,but getting the losses in writing,from an expert I assume,is gonna  cost ya. You wont be able to say,"I lost this amount" by doing your own estimating.Even if its quite accurate.

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