Tax Treatments for an Easement

An easement is a right wherein a property owner grants the use of all or part of his property without ceding ownership. Utility easements and conservation easements are the two most common. The IRS allows tax breaks for both, so it's vital to know the difference and be certain to use the correct forms when you file your tax return. Abuse of conservation easements has led the IRS to toughen reporting requirements, so you may find you need more paperwork than in the past to back up your deduction.

Utility Easements

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Utility easements are the more straightforward and traditional easements a residential property owner may come across. Your utility companies may need to use a portion of your property for telephone poles and wires, storm drains, electrical power lines or gas pipes below the surface. The utility companies compensate the property owner for permanent access, including possible damage to property in the contract when the easement is granted. Any payment received from a utility for permanent access easement is considered a sale of property, not treated as income or taxed in the year received. Instead, the basis of the property is decreased by the amount of the easement. This will affect the amount of annual depreciation and the capital gain subject to tax when you sell the property. In some cases, the city or utility may require temporary access to your property for maintenance, surveys or other reasons. If receive a payment for such access it is considered income, and should be reported on Form 1040, line 21 as other income.