If you’re a landowner who’s personally (and financially) benefitting from the oil & gas boom, you know that pipeline easement payments aren’t exactly chump change – and with big money comes big tax consequences. If you have a potential pipeline easement deal, don’t sign on the dotted line before you consider all the ways you can get more bang for your buck.
Ease Income Tax Liability
When you sell a pipeline easement, you may receive multiple types of payments with varying tax consequences. Before you do anything, negotiate and document these various payment types in a written agreement. For example, some payment types allow you to offset the income received with all or part of your basis (in most circumstances, the cost you paid for the affected property) in the underlying land.
Additionally, payments for an easement can be subject to preferential and lower long-term capital gains tax rates, while other types of payments related to the pipeline easement can be subject to ordinary income tax rates. This may come into play if a farmer’s crop is damaged or if payment for a temporary easement to access the permanent easement is agreed upon, for example.
Help control your income tax liability by properly writing and negotiating your agreement.
Defer Income Tax Altogether
Like-kind exchange rules under Internal Revenue Code § 1031 can apply to certain pipeline easement payments.
This strategy can help defer the income and tax generated from the sale of the easement by investing the funds in other like-kind property, such as other real estate. Depending on your situation, this method of income tax deferral may be worthwhile. But don’t forget that the IRS is watching –make sure you properly structure and execute this type of deal.
Take control of your pipeline easement payments – and your income tax situation. Talk to your financial advisor and attorney before you negotiate and execute a pipeline easement. Your tax situation is unique, and these professionals can help structure the deal properly. And in the end, you’ll have more money in the bank.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 1/15/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.