Tax Implications for Atlantic Sunrise Pipeline Proceeds
The Williams Company announced last year that it intends to impose temporary and permanent easements on affected landowners along the Atlantic Sunrise Pipeline.
The temporary easement is designed to gain access to the property during the construction phase of the project, while the permanent easement is designed to establish a right of way through the affected property where the pipeline will be installed.
The pipeline installation is not intended to limit the use of the affected property once it is completed; the landowners will still be able to return to farming the ground or make use of it however they did previously. A permanent loss of the use of the affected portion of the property would include a use restriction on the area affected by the pipeline. Additionally, Williams is willing to negotiate payment reimbursements for affected areas that result in crop damages.
If your property, or a portion of your property is taken by eminent domain, the payments are taxed as though you involuntarily converted your property.
Key Tax Considerations Related to the Atlantic Sunrise Pipeline Easements
There are four areas of the tax code that should attract the attention of property owners affected by the pipeline project. They are:
- Proceeds for temporary easements are considered rental income, and are subject to taxation. Temporary easements usually are obtained when a pipeline company only needs access to your property for a limited period of time (i.e. no pipeline is placed on your property but access is needed to reach a neighbor’s property), or when Williams needs to cross over part of your property temporarily during the installation of the pipeline.
- Proceeds received for permanent easements (right of way) where the landowner retains the use of the property will simply reduce the tax cost basis of the property affected. If the landowners tax cost basis of the affected portion is sufficient to absorb the proceeds, then no gain will be reported. To the extent that the proceeds exceed the tax cost basis, capital gains will need to be reported. This is the most likely situation for the Atlantic Sunrise pipeline.However, if the easement results in a loss of use for the affected property, the transaction will be considered a sale or exchange of the portion of the property affected by the easement and a gain or loss will need to be reported by the taxpayer. The gain will be long-term capital gain if the property has been held for over one year. Otherwise, it will be considered a short-term gain.
- Proceeds received for crop damages will be calculated as ordinary income to the taxpayer similar to farm profits. Crop loss payments will trigger self-employment taxes and local earned income taxes.
- Involuntary conversion proceeds received for easements due to the taking of the property by eminent domain will be reported as an involuntary conversion. The results will be similar to other easements with the only exception coming when the transaction results in a realized gain. If the transaction would result in a taxable gain, to the extent proceeds are reinvested in a similar use of the property within the replacement period, no gain will be reported by the taxpayer. The replacement period is the end of the second tax year following the year of conversion.
Landowners should seek to minimize allocation of proceeds for temporary easements and crop loss which are taxable as ordinary income and subject ordinary tax rates (maximum tax rate – 43.4%). Rather, the planning opportunity is to negotiate a payment for the permanent easement (right of way) to either avoid a gain totally or generate a capital gain (maximum tax rate – 23.8%). Additionally, the landowner may qualify for a special 0% capital gain rate if their ordinary income, net of ordinary deductions is below the 15% ordinary tax bracket, currently $74,900 for 2015. Spreading out payments over two or more years could be a strategy to utilize the 0% capital gain rate along with other tax planning measures.
If your property has been affected by easements related to the Atlantic Sunrise Pipeline, contact Simon Lever, LLP today to start a conversation about how to minimize your tax burden on this income.
By Kurtis Groff,