Having a plan to transfer assets is one part. Reviewing and having a plan for the taxes is another. A question posed in a recent article titled “I inherited land that recently sold. What will I owe in taxes?” from The Washington Post, shows there was no plan for the taxes it’s clear the plan ended with the sale of the property.
For an heir who is expecting to receive a share of the proceeds, as directed in the mother’s last will, the question of taxes is a good one. What value of the land is used to determine the heir’s tax liability?
The good news: when the great grandfather died, the land passed to the mother and her siblings. To keep this example simple, let’s assume the great-grandfather’s estate was well under the federal estate tax limits of his time and there were no federal estate taxes due.
Next, the mother and her siblings inherit the land. When a person inherits an asset, they usually inherit both the asset and the step-up in the value of the asset at the time of the person’s death. If the great-grandfather bought the land for $10,000 and when he died the land was worth $100,000, the mother and her siblings inherited it at that value which helps reduce capital gains taxes if they want to sell the property.
When the uncles sold the land after the death of their sister, the mother, her heirs inherited her interest in the land. If the person asking about taxes is an only child and an only beneficiary, then he should receive his mother’s one-third share of the land or one-third share in the proceeds. With the stepped-up basis rules, the son inherits the land at its value at the time of the mother’s death.
Assuming the land was worth $300,000 at the time of her death, the son’s share of the land would be worth $100,000. That’s his cost or basis in the land. If he sold the land around the time she died or up to a year after her death, receiving his share of $100,000, he could not have any federal income or capital gains to pay.
If the family sold the land for $390,000 recently, the son’s basis in the land is $100,000 and his sales proceeds would be $130,000, or a $30,000 profit. He would be responsible for paying income taxes on the $30,000.
There will also be state income taxes due on the profit and there’s an additional 3.8 percent tax on the sale of investment property. If the son used the home on the land as a primary residence, there would not be an investment property sales tax.
In this kind of situation where there are multiple heirs, it’s best to consult with an estate planning attorney to ensure that the transaction and taxes are handled correctly. Also, property tax increases in California should be addressed. In this example, the son’s 1/3 interest in the property inherited would be subject to a property tax increase as of the date his mother died and be in effect until the property is sold.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: The Washington Post (July 26, 2021) “I inherited land that recently sold. What will I owe in taxes?”