Tax implications of land grant

Around here we have some now-beautiful lakes that were formerly gravel pits, so it seems your children might enjoy the peace and quiet, even though you won't. I don't think it could be considered a gift, because a gift implies no economic motivation for the transfer, and that is clearly not the case. Worst case scenario, it would be some kind of advance royalty, in which case the fair market value would be taxable income. But what is the fair market value? What you gave up was the right to no development within 150-300 feet, but you didn't own the property to begin with. If you sold your property with the additional footage "today," would it fetch any more than it did the day before the transfer? I would guess not. In that case the fair market value of the transfer would be zero.

I would think not, because it's a fair value exchange. Your current backyard is 300+ feet from a gravel pit; after the exchange, it will be only 150+ feet, but it will also be bigger.

Despite the state law?

That increases the forward value, but that's presumably taken into account in the exchange.

Seth

Fair exchange has nothing to do with it. All kinds of fair exchanges, whether for cash or not, have tax consequences.

The issue here is whether it's a like-kind exchange. In this case OP is giving up rights he has in real property he does not own (which is not a real property right) in exchange for real property. Doesn't sound like a like-kind exchange to me.

I am giving up the right to have the pit 300 feet away from me, as is under state law. In exchange, I am getting some land. Is that a valid argument? Also, Mr. Bronstein, what does your thought imply as to my tax liability (if any)??? Thanks.

It sort of does to me, but are like-kind exchanges even applicable to homes?

I don't understand the premise here. State law prohibits gravel operations within 300 feet of a residental area. The gravel company gives the landowner more property, thus extending the residental area, and the 300 foot exclusion zone. How does that give the gravel company more area to quarry?

It's probably valid for something, but not too helpful to you as far as I can tell.

Income is an accession to wealth. So the issue is how much you actually profited. Others here will probably know better than I do, but off the top of my head I'd think this is one approach:

First get an appraisal of the 150 feet of property you will be receiving. My guess is that it won't be worth very much out on the open market. That amount will be your taxable income. It will also be added to your basis.

Then I'd get an appraisal on your house/property before and after the transfer, and see what the difference is. If your home is worth less after the transfer than before, I'd think that would also go to reduce your basis.

There may be a way to avoid the tax, but I can't think of one.

In general §1031 tax deferral only applies to property held for business or investment. So even if it were a like-kind exchange, if it's not business or investment property it would not likely qualify for tax deferral.

Sounds like to me that the prohibition applies without the permission of the contiguous landowner. As a result the quary has

"Sounds like to me that the prohibition applies without the permission of the contiguous landowner."

That might be it. Or, it might not be. You are assuming something not in the OP. I was seeking clarity, that is all. It might have relevance to the analysis.

They owned the property from my property line to the current pit (That is the 300 feet SETBACK). They gave me 150 feet of their property in order to get 150 extra mining area because now there is only a 150 foot setback.

He's giving up rights he has in real property he does own (the right not to have a gravel pit within 300') in exchange for real property. Is that close enough?

Seth

Ok, sounds like the state law is that you can't quarry within 300 feet of a residence (not "residential area"). Thanks for clarifying.

I don't understand that. If his house didn't move, they don't gain anything extra by giving him the land.

Seth

yeah, I think you are right. I guess the state law prohibits a quarry within 300 feet of another's property line for residential property without the permission of the resident, and the deal was made so the resident would grant permission to quarry to within less than 300 feet of his new property line.

The state exclusion is 300 feet from my original property line. The company wanted to bring it closer. They give me 150 feet and I give them the right to go up to my NEW property line. They got 150 feet more to mine and I got 150 feet more to my property. Of course since my house (and everyone else adjacent to the pit) was built with set-backs based on the original line, the distance between my house and the pit is substantially further. (And further mitigated by the old farmer's tree line still being between us and the pit). We were mainly worried about them being able to sell the area around the lake to build homes behind us when the stone and gravel played out. This doesn't leave them enough room to put in a road let alone houses.