Calculating adjusted basis, capital gains, and taxes due from life estate due to sale of part of the property

[wallacee]

Scenario:

My wife passed away in 2008

I have I a life estate on 100 acres

Value per acre in 2008 was $500

Total land value in 2008 was $50,000.00

One remainderman on life estate

2024 Oil Pipeline "easement" (surface purchase)

Value per acre in 2024 is $2000

Step up of $1500 per acre

Total surface area of two acres

Total received $20,000 ($10,000 per acre)

The $20,000 is split, per IRS tables. 80% goes to life estate holder and 20% goes to remainderman.

1. How do I adjust the land basis value?

a) Adjust the basis of the life estate down by $17,000 ($20k - step up of $3k) making the adjusted basis $33,000 or

b) Adjust the basis of the two acres down by $17,000 ($20k - step up of $3k), making the adjusted basis of the two acres $0 and claiming $17,000 in current capital gains and paying taxes on those capital gains?

c) Something totally different?

2. Are capital gains currently taxable?

a) If so, how do I report the receipt of my 80% portion of $17k (($13,600) on my income tax form and report the other $3,400 as going to the remainderman?

b) If not, how do I report the sale, receipt of monies, and division of monies on my income tax form?

[RobertB4444 · Accepted solution]

You're going to report this on schedule D as a sale of a portion of your property.  You are selling two acres.  Based on the information that you have provided your basis in the property is $500 per acre which was its value at the date of death of your spouse who you inherited it from in 2008.  So that is a $9,500 profit per acre for this easement.

If the remainderman is getting 20% of that then you would report your 80% on the trust return or on your personal return and the remainderman would report their 20% on their personal return.  Or you can report 100% on the return that you are preparing and just pass the cash to the remainderman as a distribution.

@wallacee 

[wallacee]

Thank you, Robert.

Since long-term capital gains are taxed a 0%, 15%, or 20% (which is less than my tax rate), and since short-term capital gains and long-term capital gains are rolled up from Schedule D onto one line on the 1040, how/where is the long-term capital gains tax rate calculated and applied to the long-term capital gains (which this will be)?

[DawnC]

Included in your tax return, you will have a Qual Div/Cap Gn Wks (qualified dividend/capital gain worksheet) that will show how the tax was calculated.       

On the Form 1040 Worksheet, there is a Tax Smart Worksheet that will show you what worksheets were used to calculate your tax if the tax table was not used.