Tax Basis?

[thiggy]

I am considering selling a plot of rural farmland which was given to me about 15 years ago by my father. He received it as part of an inheritance when his mother died about 1960. My question is how do I determine my basis in this property for income tax purposes after I sell it?

[tuttlejr]

Discuss this with a CPA. They keep up with problems like this.

[cgallery]

Discuss this with a CPA. They keep up with problems like this.

Well, maybe yes and maybe no. My family was recently faced with determining the tax basis of some stocks owned by my father in Wisconsin (marital property state) that my mother held upon his death and which she wanted to give to the three sons two years later. We needed to know the tax basis. We consulted several CPA's, and even the IRS, and everyone gave us a different answer. The most common answer was that there was a half-step up in basis because my father had died and they were marital property. Many CPA's told us this. The IRS, too. That is incorrect, though. Upon a spouses death, the remaining spouse gets a full step-up in basis on the stocks. I don't know if this holds for other investments (real estate, etc.), but it does for stocks.

When we finally found the guy that knew the answer, he told us very matter of factly. When I questioned him, within five seconds he had the correct IRS code on his screen and was quoting it.

So be careful when taking CPA speak as gospel.

BTW, to demonstrate how expensive bad advice is: My mother was forced to sell some stock in an organization upon my father's death. Besides getting bad legal advice, she used the tax basis computed by the organization and paid an absolute crap-load of taxes on the transaction. She shouldn't have had to pay any cap. gains. But she didn't find out until it was too late to amend the return. She paid an extra five figures in taxes on that single transaction due to poor advice from an idiot tax preparer at Jackson Hew-twit.

[Deadhead]

I am considering selling a plot of rural farmland which was given to me about 15 years ago by my father. He received it as part of an inheritance when his mother died about 1960. My question is how do I determine my basis in this property for income tax purposes after I sell it?

First let me say, I'm not a tax expert in any way, shape, or form. I just find the subject interesting and read about it. (stop laughing)
Find a practicing Tax Accountant, not a CPA. Unfortunately, the tax code is so out of hand, no one really knows for sure what it all means.

Your situation touchs on a couple of different areas. First is the inheritance. Your fathers cost basis was the value of the land on the day of his mother's death. That's the easy part.

Assuming you were an adult at the time, I think the transfer from your father to you will count as a "gift". There is a gift tax that is paid by the giver. I'm not sure what happens to the cost basis though. I think you'd get a stepped up cost basis because, for tax purposes, they use the value on the day of transfer. Again, I'm not sure about this. I've only read about gifts of cash, not property. Gifts that are in excess of the non-taxable allowance ($12,000 in 2006) can be applied toward the estate exemption.

So I think your cost basis is the value of the land 15 years ago. How do you determine the value now, 15 years after the fact? No clue how to do it correctly. When my father-in-law died, we used the county's assessed value of his house to determine cost basis when we started renting the property and depreciating it. Was it right? Nobody's complained yet. It's unlikely that the IRS will go back that far when we sell it.

Another thing to check in to is "land use". There may be special tax situations for farm land.

[cabinetman]

I have an idea. Sell it to us for $1.00 so we can build a big shop, and you can write it off as a loss.



"I'M NEVER WRONG - BUT I'M NOT ALWAYS RIGHT"

[os1kne]

I'm a CPA and tax accountant with a large CPA firm. First off, there are different specialties and skill/knowledge levels among members of any profession - medical, law, etc. just like some plumbers, mechanics, or whatever specialize in different things. There are good and bad CPAs just like anything else. Most people associate CPAs with tax work, when around 80% of CPAs work in corporate accounting departments and do very little tax work (usually struggling to prepare their own tax returns).

Deadhead is mostly correct in determining your basis calculation.

Your father's basis would be the fair market value (FMV) at the date of his mother's death*** (or up to 9 months later if there was an estate valuation done subsequent to her death). If your father made any improvements to the property (utilities, built a barn, fence, road, etc.) - his cost of these improvements would increase his basis. If your father paid any gift tax on gifting the property to you, this would also increase the basis of the property.

Basically, your basis = his basis at transfer + gift tax paid + any improvements that you have made subsequent to the transfer.

***Determining the FMV at the date of your grandmother's death may be very difficult to determine. The last thing on a person's mind when a loved one passes is getting an appraisal of the property of the deceased. You may be able to go to the county courthouse and see if they can dig up records on property sales of similar properties from around the same location and time. You would be wise to find 3 different sales and use the average sale price/acre x #acres of your plot.

Good luck.

[MilDoc]

First off, there are different specialties and skill/knowledge levels among members of any profession -

Absolutely agree. But, let's face it, we have one of the most complicated, incomprehensible asinine tax codes ever. And the taxpayer is always responsible for mistakes, even if they act on an answer from the IRS itself which is known to give wrong answers far too ofte.

Time to scrap the entire hodgepodge and start over. But then the politicians would find it oo hard to give tax breaks to their friends and supporters!

[os1kne]

I agree, our tax code is far too complex. I've often said that if the tax code was made so simple that I was no longer needed to do tax work, I would gladly find some other way to make a living.

[430752]

then why do we have it?

Everyone I know, and those I don't know but speak to (like y'all), agrees the tax code is whack. Yet we still have it. Why? I'm not sure, but if it truly is everyone who hates it, and if we all agitate for change, then we can get it done. So, lets all quit whining whining to each other, and whine to the Man. Of course, the man is on the take from the few people for whom the tax code does work, thus the Man won't change a darn thing, but let's do it anyway!

curt j.

[frumper64]

Keep in mind that tax laws generally have nothing to do with fairness or common sense - they exist to redistribute wealth as the government wishes. That's why there are so many arcane "loopholes" and provisions to it.