Immediate sale of inherited farmland - tax implications?

[DLPinSR]

My mother passed away last year and my brothers and I inherited some farmland in Illinois.  I live in California; neither of my brothers live in Illinois.  I didn't want to own the land so my brothers bought my share.  We agreed on a price and filed the paperwork, which took several months.  It's my understanding that there are no capital gains to be paid on this sale, since I sold my share to my brothers immediately after inheriting the land (paperwork delays notwithstanding).  However, I am unsure about how to report this on my tax returns, or even if it's necessary to report it at all.

On the federal return I can enter the sale as an investment sale that did not generate a 1099-B.  The sale price is the same as the basis, so no taxes are due.  Is that the correct procedure?

On the state level, is there anything I need to report to either California or Illinois?

[LudwigVan_fan]

Hi:

As to state implications, I don't know about CA or IL.

For federal purposes, if the price you sold your share of the farmland for was = the FMV of the land on the date of your mother's death, there there would no gain or loss.  If the price you sold your share for was not the same as the FMV on the date of your mother's death, there could be tax implications.  It really depends on how you arrived at the price of the sale.  That may or may not have been = FMV that a 3rd party would have been willing to pay/receive.

[DLPinSR]

We did our best to determine the FMV -- looked at lots of comparable sales, picked the midpoint.  There should be no taxable gain.  My concern is about how to report the transaction, or whether to report it at all since there is no tax to be paid.

I can report the transaction easily enough using the "transactions you didn't get a 1099-B form for" on the federal return, with the tax basis equal to the sales price.  I hope that's the right thing to do (?).

I found out that IL doesn't require you to file a return if there is no tax liability in that state so that's one thing less to worry about.  I'll assume the CA return will take care of itself in Turbotax since I have to file in CA anyway.

[LudwigVan_fan · Accepted solution]

I would report it...that way there is no "hidden" sale or income.

I would report it the way you suggest.  If possible, I would put in a note somewhere stating basis is stepped up or an inheritance basis.  That could be in the description of the property.  That would be a quick/easy explanation as to why no gain/loss on sale.

[Rick19744]

Keep in mind, that the IRS isn't fond of "we did our best to determine FMV".

If audited, not saying you will be or this is a trigger point, the IRS will certainly review your methodology.  If they are not comfortable with your methodology, they will challenge your figures and then that most likely will lead to an appraisal by a professional.

Just want you to be prepared ahead of time should it become an issue.

[DLPinSR]

Ugh - didn't know that.  Thanks for the heads-up.  We might decide that it's best to get that professional appraisal sooner rather than later.

[LudwigVan_fan]

Going to play "Devil's Advocate" here.

Let's say IRS challenges the numbers.  Which number are they going to challenge?   If they challenge the FMV of the basis and raise that number, then you might have a non-deductible loss.  If they lower that number, then you might have a gain.

But, an argument could be made (especially since the date of death & date of sale are close together), that if one number is changed, then both numbers should be changed to the same thing...unless it could be should the farmland either appreciated or depreciated substantially in the time frame between date of death and date of sale.

Now, if there was a substantial amount of time between DOD and sale, there would be room for fluctuation of value.  Or, if this was something that was a bit volatile; such as stocks or something similar.  Although with stocks, FMV is easily determined as the value is determined based on the high/low value on DOD...which works for publicly traded stock.  Privately held stock is a different matter and might require an appraiser.

Just something to think about and mull over.