I am soon to inherit about $400,000 from the sale of our family farm.
I am afraid of the tax hit which I estimate at 35% to be around $140,000. I want to avoid that.
Could I avoid it by using the money to buy a home or should I look at buying other farmland or investing in other business property?
Thanks.
When you say inherit, do you mean somebody died, or a living person is selling the farm and giving you money?
If the farm is in an estate, the estate is responsible for paying any applicable estate taxes before any distributions are made.
We inherited the property but now we want to sell it.
I’m pretty sure some clues about location would help here.
I’m not tax lawyer, nor am I yours. I believe there is a provision that the value of the property is considered as of the time of the death of the previous owner, and your “gain” would only be the increase of value since then. I’d check with a tax professional, of course, but that’s the question I’d start with.
This.
Both my wife and I as well as our siblings have inherited properties that we then sold. The value upon receipts is subtracted from the sale amount and the difference is the taxable capital gain. However, if you’ve lived in/on the property for 2 out of the past 5 years, the first $125K ($250K for a couple) are not taxed.
Just recently we sold sold a property my wife inherited. It’s value when she got it was $260K but we were only able to get $215K for it. After a long time on the market we decided to let it go. We’ll have a loss rather than a gain and shouldn’t have any tax liability on it.
I think what changes this is if the value is over $1 million. I’d talk to a tax attorney about it either way.
It depends on when the death occurred; federal tax has excluded at least $5 million since 2010, and it hasn’t been as low as $1 million since 2003.
Don’t forget state taxes.
If the property is NOT in your name, there are NO capital gains tax. If it is in your name, capital gains MAY apply depending on the sale price.
If sold below market value, there are no capital gains OR income taxes.
That was our situation when we sold our mom’s house; it was still in her name and sold for 117k, valued at 125k.
BUT… still consult a good real estate attorney, you’ll need one anyway for the closing of the sale.
We did have to pay 1/2 half of the property taxes… negotiated.
This is something you really want professional advice on. If there’s someone handling tax issues for the estate, they’ll be your best resource. The exact details of your situation will be very important in answering the question correctly.
In a general sense, you don’t pay tax on inheritance, only on income.
If there is income to the estate, some of that may be taxed to the estate and some may be passed through to you as part of the inheritance.
As someone noted, the basis of the property is set to fair market value at the date of death (or six months later if the estate elects that), which means the gains on a sale from an estate are usually minimal. In fact, they’re often losses after selling expenses are factored in.
If it’s inherited, your basis is set as of when you inherited it - whether it’s been transferred to your name in the property records or not. Also to clarify “sold below market value” means “sold below what it was valued at when you inherited”. In the above example, it was valued at 125K when mom died, and it sold at a loss compared with that.
If you’re selling it reasonably close to when you inherited, the capital gains should be minimal simply because its value hasn’t changed that much.
As far as inheritance taxes: if the total estate consisted just of that 400K property, I don’t think there would be any (or not much, anyway); I don’t recall what the cutoff is. Even if there are taxes, the estate’s cash assets could be used to pay those. If there aren’t enough cash assets, then the farm might need to be sold so the proceeds can cover the estate tax.
But long story short, you will not be paying income tax on 400K. If the place was worth, say, 350K at the time of the owner’s death, you inherit that 350K basis and your gain is 50,000. You could make the farm your residence for a time and avoid the taxes even on that 50K, but that’s an enormous hassle and would require you to own it for several years - something I assume you are not interested in.
Waste not time piddling around this message board, which is to a great extent a soap box used by the uninformed. Post haste, spend a few bucks and go see a CPA or a local lawyer who does probate.
I expect, unless you are hiding facts, that the tax basis from which taxable gain on the sale will be calculated is the value of the property at the time of the previous owner’s death. Unless you have been waiting around for decades the tax basis and the sale price ought to be pretty much the same number. Thus, little or no income/capital gain tax.
For purposes of Federal Estate Tax an estate of a bit more than five million dollars, and in the case of married couples a bit more than ten million dollars, is exempt from tax and only the excess over the exempt amount is taxed.
The state where the land is located may have an inheritance tax. In many states anything going to lineal descendants is exempt from the state’s tax. Otherwise there might be a state, not federal tax, on the passage of property from your decedent to you.
Bur, high 'ye to a CPA/estate lawyer.
Just chiming in with the majority. We also inherited property when my MIL died & we sold it shortly thereafter (within a year of her death). The value for tax purposes was based on the “stepped up value” at the time of her death.
So even though she had purchased the property in the 1980s for less than 100k, the capital gains we paid was based on the value at the time of her death in 2012.
Double both those numbers.
It gets better than that too… if you sell the property close to the date you inherited it then the sale price is likely to be the FMV and thusly the cost basis. You may be able to claim a loss for the commission and any other selling costs involved.
If you reduce it below market price for a quick sale then your loss is even greater than the above scenario. Capital losses offset capital gains and $3000 of a net loss can be used each year going forward.
When asking for legal or medical advice about real-life situations, we prefer that they be in the IMHO forum rather than General Questions. Moved.
samclem, moderator
Details, please.
When you say ‘inherit’, I assume you mean a relative died, and the family farm was part of the estate. (Please confirm.)
Who is the executor? This is the person who would pay the estate taxes, if any. Has this person filed a form 706 (the Federal estate tax return) yet?
Note that Federal estate taxes come out of the estate, before it is distributed. The executor handles this (or should). And if the death is relatively recent (this year or last, e.g.), there’s no Federal tax if the estate’s assets totaled less than $5 million, as others have mentioned.
Following up the previous paragraph, what other assets are in the estate, and how much are they worth altogether?
What state do you live in? While most states don’t apply any estate/inheritance tax below the Federal tax exemption level, some do. (When my mother dies, D.C. will take a bite of her estate, even though the Feds won’t.)
As others have mentioned as well, any assets you inherit (or that are sold by the estate) get a ‘stepped-up basis,’ that is, for capital gains purposes, it’s as if you (or the estate) purchased this asset on the day the deceased person died, and you or the estate only has to pay capital gains tax on any increase in valuation since the decedent kicked the bucket. So if the person died two years ago, and the farm was worth $400K then, and now it’s worth $410K, you pay capital gains tax on only the $10K increase.
There are 4 numbers in the post you quote!
Yep. We just covered this in income tax accounting this week.
Not a CPA, not a lawyer, but per my 2014 textbook, your basis in the property is the fair market value as of the date of death of the decedent.
When you sell, your gains are your selling price minus your basis minus commissions, etc (and, in the unlikely event you’ve made capital improvements or had an insurance claim, those factor in too).
Obviously, you’re going to get a professional. But your way looks pretty good.
Dad left my share of the ranch to me. It’s value in 1972 was $90,000. In $2005 I sold it for $350,000. I did a 1031 exchange on bought a investment property. As of yet I have not had to pay any capitol gains tax.
