I am selling a buffer easement for property adjacent to a future reservoir. The county is offering 90% of the FMV. How do I treat the capital gains tax now and in the future?

I will still own the property but will not be able to develop it; I will be able to sell it in the future at what I hope to be a huge gain because it will be lake front property.

The easement is highly restrictive. I can't even put up a tent and camp on my own property nor can I ever harvest timber from the easement. I have harvested timber from this property in the past so it's primary use has been forestry.

Numbers
basis per acre
$14,190

sale price per acre (90% of appraised value of 15k per acre)
$13,500

On paper this is a loss $690 loss per acre but I still own the land. In the future the property may sell for $50,000 per acre or more or it may be an inheritance for my children.

How do I treat this transaction for the purposes of reporting a long term capital gain or loss on schedule D? What if I resell the property in the future at a huge profit what will my basis be then?

Easy:

Present basis per acre $14,190
Sales price per acre $13,500
New basis per acre $690

Future price per acre $50,000
Future capital gain per acre $49,310 (future price less new basis)

But how do you figure on selling it for $50,000 per acre sometime in the future? Land subject to an easement making it useless will not sell at any significant price.

AK Lawyer Thanks,

It makes sense that the basis is reduced to the residual difference.

To answer your question about how I figure to sell the property at a huge profit is that I own the property adjacent to the easement. Let’s suppose that you would like to build a house on lake front property. The zoning is currently 2 acre minimum lot size. I sell you a 2 acre lot, one acre has no restrictions other than normal county permit requirements etc. the other acre is the easement.

Of course uncle Sam will be happy because the basis will be ($14,190+$690)/2 = $7,440 per acre I sell the 2 acre lot for 100k - $7,440 basis per acre my gain is $85,120 so depending on the capital gains tax rate in the future I'll be taxed on my 85K profit.

Or I could build my primary residence on the 2 acre lot live in it for 2 years then sell it and escape the tax altogether. I know that the IRS begins to think of this approach as normal income if a pattern is established of building and selling every two years.

If the death tax is not repealed I could leave my 3 children with a pretty nice nest egg at which time the basis would be stepped up to FMV upon the death of both my wife and myself.

To answer your question about how I figure to sell the property at a huge profit is that I own the property adjacent to the easement. Let’s suppose that you would like to build a house on lake front property. The zoning is currently 2 acre minimum lot size. I sell you a 2 acre lot, one acre has no restrictions other than normal county permit requirements etc. the other acre is the easement.


Assuming the local platting authority will allow you to re-plat your lot so as to in effect avoid the purpose of the minimum-lot-size restriction &/or the restrictive easement. :)

I have already verified with the county that the easement can be included as part of 2 acre lot requirement. Actually I could sell 11 smaller lots on 2 acres as long as I do not exceed the maximum of 11 lots for the whole parcel. Of course I could request a rezoning... but I plan to live there. I only want to see my neighbors when it suits me.

Currently I live in a neighborhood where I can paint my neighbors house if I lean out of my bedroom window. Well it's not quite that bad but you get my drift.