[Carpenter] Tax status of permanent easment for GRP

[Kevin Carpenter]

All -

Spent an hour+ on the phone with the IRS trying to figure out how a
permanent payment would be taxed.

Key is this is an "easement".  Options exist (at least at the Federal
level, not sure if the State will play this game) to either take a lumpsum
payment or spread it over up to 10 years.

Now, as an easement, it will reduce the taxable value of the property by
the payment amount - so if today, your land is worth $1500/acre for tax
purposes, and you received a $800 GRP permanent payment, the tax basis
would drop to $700/acre ($1500-$800).

The counter-point is that the "basis" value of your land will also drop by
$800/acre (the payment amount).  So when you sell, the capital gains value
will be higher.  Let me give an example:  Say you bought land at
$1000/acre and take the $800/acre GRP payment.  At that point, you basis
drops from $1000/acre to $200/acre.  If you later sold the land at
$2500/acre, you would pay capital gains not on the original difference of
$1500 ($2500 sold - $1000 paid), but of $2300 ($2500 sold - $200 basis). 
Think of the GRP payment as an interest free capital gains loan...

BIG NOTE:  I suspect having an easement on your land will reduce its
future value significantly since future owners would be bound by the
easement.  No biggie for a cattle rancher - VERY BIG deal for a house
developer.  Of course, we don't want them in our neighborhood anyhow.
<smile>

The payment itself is not taxable unless it exceeds the value of the land,
which the GRP program assures will not happen since the GRP payment can
not exceed 50% of the value of the land (and I believe this is all cooked
into the $800/acre number - meaning Adair County land is uniformly viewed
as being worth twice that, $1600/acre, by the government folks that figure
this out).

One note for anyone considering taking this as a windfall, and giving the
funds to their children - Gift Taxes still apply if you give too much (I
think the limit is $20K/parent/child/year).

Of course, check with your own tax people and please don't hold me
accountable if any of the above is wrong.

Cheers!

Kevin