Question

In 2006, Terry purchased land for $150,000. In 2015, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property. Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land. Is this statement true or false?

Answer 1

The statement that Terry does not need to recognize income from receiving $10,000 for an easement from a cable company is false. Such payment is considered income, not a return of capital, and is typically taxable.

Step-by-step explanation:

When Terry receives $10,000 from the cable company for allowing them to run an underground cable across his property, this is considered income, not a return of capital. Capital return would imply recovering the invested amount without any profit, such as when you sell an investment for the same price you paid for it. However, Terry is receiving additional money for granting a right or easement to use his land, which is typically taxable.

The situation with Terry is essentially a transaction where he is paid for providing a service or benefit to the cable company – allowing them to use his land. Just like Freda's house value appreciation does not convert into immediate taxable income until a sale occurs, Terry's land value remains a separate matter from the income generated through granting easements or rights to others. The $10,000 paid by the cable company is considered revenue from Terry's point of view and is generally taxable under the Internal Revenue Code. In real estate and accounting terms, these payments rarely constitute a return of capital but are often treated as ordinary or sometimes capital gains income, depending on the specific circumstances surrounding the transaction.