We are selling some family farmland and in Nebraska. We should make about a million off of it split 2 ways between brother and sister.
We would like to avoid the big tax hit. I think its like 20%?
What would be some good options?
Is it true if you put the money into some other form of real estate you dont have to pay the taxes? If so does it have to be another farm? Could it be a house or some commercial property?
And lets say I do just go ahead and pay the taxes. I’d like to look at some stocks or mutual funds to put the money in. Where do I go to get good advice? I’ve used Edward Jones and found them to be ok but is there another firm you would recommend?
If you sell real estate you may have to pay capital gains taxes, which can end up being a lot more than 20% in some cases. If this land is part of an estate then your capital gain is based on the value of the land at the time of the original owner’s death; you only pay tax on the gains, not the whole value of the land. But the estate may also owe estate taxes depending on how much is in it.
Yes - this is called a Section 1031 exchange. The new property must be of substantially similar character to the old one, so if you’re selling farmland you will probably need to buy other farmland. 1031 exchanges have to be done according to a strict protocol within a certain time limit; there are people who specialize in these kinds of transfers.
Vanguard is the best in the business, and I highly recommend their low-expense-ratio index funds to everyone I meet.
For a sale of this size, you should really consult a qualified real-estate lawyer to learn about your options.
Since the OP is looking for advice, let’s move this to IMHO.
Colibri
General Questions Moderator
I second that. Exchange Traded Funds (ETFs) are the end-all and be-all of investing these days. And I think Vanguard invented them.
Vanguard didn’t invent ETFs (they did pioneer index funds, and there are now ETF versions of many of their funds.)
For long-term investing I prefer buying index funds directly rather than using ETFs as they are cheaper to own and trade (though somewhat less liquid.)
When I bought my house, one of the reasons we arranged to do a Contract for Deed was that instead of a single big payment to the owner, it was structured as smaller payments over several years. That reduced the tax burden for her as seller. It also meant the interest was paid to her, rather than to a bank or mortgage company. But she also had the risk, if I had defaulted on the payments.
(Also, she wanted to give money to her children – had she done so as a single big amount, there would have been gift tax owed on it. By spreading it over several years, the amount of the gifts were less than the gift tax amount.)
If you want to invest the proceeds in stocks and bonds, then perhaps visit https://www.bogleheads.org/. Edward Jones is notoriously expensive, with a sales-driven culture. Vanguard is good, and I think they’d provide some basic advice for free with $500k invested. There are other good, low-cost options, but Vanguard was the pioneer. At least at Vanguard, there is no significant difference between ETF vs. mutual fund expense ratios and other costs.
If you want more extensive advice, then pay a professional by the hour. Don’t use an advisor who gets paid out of commissions for products that he sells you. A good advisor will be a fiduciary (i.e., legally obligated to act in your best interest), and will be able to show you where he promises that in writing.
I agree that it makes sense to engage a qualified tax advisor (e.g., a CPA) here.
Avoid any offer that begins “Have I got a deal for you!”. That said - Have I got a deal for you!
This is important. It’s also something that gets ignored when people complain about estate taxes.
If you inherited the property, the capital gains accrued during the life of the person you inherited it from just disappears. The estate pays estate taxes, but only after a big deductible. To qualify for estate taxes, the estate has to be bigger than $5,340,000 for people dying in 2014, $5,430,000 for people dying in 2015, or $5,450,000 for estates of people dying in 2016. Estate taxes are applied only to the portion of the estate above those amounts.
Eight states have inheritance taxes, and it looks like Nebraska is one of them. The percentage levied depends on the inheritor’s relationship to the decedent. Parents, grandparents, siblings, children and a few others are Class 1 beneficiaries. If you trust Google, the tax on an inheritance, minus a deduction (different online sources list different deductions) is 1 percent.
Class 2 (more distant relatives) is taxed at higher amounts, which vary with different online sources, and Class 3 (unrelated people) is taxed at up to 18%. Inheritors pay only on the portion they are allotted, minus a deduction. There are homestead and other exemptions. There are expenses that can be taken out of the estate. It definitely looks like it needs a lawyer to minimize the tax.
If I remember correctly, there will be no income or gift tax on the inheritance.