Capital gains on land sale

[sheryljo]

My mother sold a portion of her land (3 acres) to us at a very cheap price ($3,000)  approx. 3/4 years ago...she wanted us to build a house right beside her but she has now passed away.   I have now sold that land for $190,000.  Will I need to claim the difference as captial gains?   Are there any adjustments such as the selling price minus fair market value instead of what mom sold it to us for...etc?

Could we avoid the capital gains tax if we rolled the proceeds over to our current home mortgage?

We live in Iowa - will we have to pay state taxes as well?  

thanks in advance.  

[Mike9241]

what occured was part sale part gift. so IRC sections 267 and 1015 determine the reporting

if the $3,000 sales price was less than her basis the loss would be disallowed under IRC 267.

if the fair market value exceeded her tax basis by $16,000 she should have filed a gift tax return form 709.

good news. under IRC 1015 your basis is her basis (plus the costs of any improvements made by you after the gift) unless her basis was greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value (+ cost of post-gift improvements). for determining gain you use her basis (+post-gift improvements). more good news is that you use the date she acquired the property for determining long-term vs short-term 

[TomD8]

Q:  Will I need to claim the difference as capital gains? 

A:  Yes.

Q:   Are there any adjustments such as the selling price minus fair market value instead of what mom sold it to us for...etc?

A:  No.  This only occurs when property is inherited.

Q:  Could we avoid the capital gains tax if we rolled the proceeds over to our current home mortgage?

A:  No.

Q:  We live in Iowa - will we have to pay state taxes as well?  

A:  Yes.  The only exception in Iowa is that net capital gains from the sale of real property used in a business are excluded from net income on the Iowa return of the owner of a business to the extent that the owner had held the real property in the business for ten or more years and had materially participated in the business for at least ten years.

[sheryljo]

Mike9241

thanks for your answer unfortunately she did not file a gift tax form before she passed away (a couple of years ago).  i doubt there is anyway we could claim that now..?????    with that said does that change your response.  as you can see i received another answer that says there is nothing we can do.  

again thanks for answering.

[Mike9241]

it's my opinion that the non-filing of the gift tax return does not change the facts that she made a gift of $XXXX.   however, the tax laws as to gifts are complicated. so for the best advice see a lawyer who is currently practicing.

There is technically no actual dollar penalty for filing a gift tax return late unless gift tax is due (although leave it to the IRS to try to assess something).

However, filing a return starts the running of the 3-year time period for the IRS to challenge the valuation(s) reported on the return (if you never file the statute never begins to run). 

that's what you risk if the return is never filed, 20 years down the road the IRS could say the valuation was too high 

[Anonymous_]

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@Mike9241 is correct and, per Section 1.1015-4(a), your basis is the greater of what you paid your mother for the property ($3,000) or her adjusted basis at the time of the transfer.

Further, at this point, the failure to file a gift tax return (709) is largely immaterial assuming your mother passed in 2020 and did not exceed her lifetime exclusion amount of $11,580,000.

See https://www.irs.gov/pub/irs-prior/i709--2020.pdf

[sheryljo]

This land sale is still driving us nuts....we received a1099-S ...so we hired a 'tax attorney' who said he could help - 5 weeks later we still do not have a final answer.... here is what he said last time we spoke - - the transaction is a 'part gift/part sale'  He indicated that he need to know what our folks paid for their property (full 15 acres including their house) in 1957...($15,000)  and he also needed to know what the value was in 1983 when dad passed away. (?)  so he could figure 1/2 of the value that was moms at that time.  Indicating moms basis would be $7,500 + 1/2 of the 1983 value.   This doesnt make sense to us/sounds like he's figuring the entire acreage as her cost basis? 

He indicated we would not need to file a Form 709, but if not where does the 'gift' come into play? 

When we first spoke with him he thought we might be able to use the amount of the sale and substract what the 'fair market value' was in 2015 from the total price we received & we would pay capital gains on that.  Now its becoming so much more complicated/we are more confused that ever.  

I would so appreciate anyone that can help us sort this out.  Thank you in advance!!!

[Anonymous_]

I recommend (highly) following the advice of counsel since you obviously have secured same.

Your attorney is correct on two points and those are (a) there is really no need to file a 709 at this late date (but there was a gift) and (b) the transaction was part gift/part sale, per Section 1.1015-4(a), as I indicated in my previous post.

Of course, this scenario is complicated, but it appears as if you need to track down the figures your attorney is requesting. 

[MarilynG1]

Reporting somewhat depends on how the deed was held.  If both mom/dad were on the deed, when dad passed, automatically passes to mom.  When mom passes and you inherit it, the FMV at time of mom's death is what you would use reporting your cost basis for the sale.

However, if you were added to the deed at some point before mom's passing, then mom 'gifted' half her cost basis to you.  If that happened in 1983 when dad passed, yes, you would need 'adjusted basis' on that date to determine the cost basis of your half. The adjusted basis would be half of her cost basis of $7500, plus the value of improvements (reasonably FMV).  It might be a problem determining this number for 1983. Old tax records may need to be reviewed.    

If you sold the property, then your cost basis is half the property FMV at time of mom's death, and half at FMV at gifting date, so your attorney is on the right track, if this is the case.  

You would add the cost basis of each half together to determine your Cost Basis and any gain/loss at time of sale. 

Gifts are reported to the IRS (but generally not taxed) by the giftor so they can track them.  If you 'gift' over 1.2M, then the giftor is assessed tax on their gifts.  A Form 709 would be filed separately from a tax return, but since the giftor is deceased, it does need to be filed.  It may have even been filed the year of the 'gift'.

@sheryljo 

[Hal_Al]

 You don't say what happened to the house and the other 12 acres? 

What happened in 2015, that you're talking about the 2015 fair market value?

It seems to me that the Simple answer is: most of the $190,000 is taxable as a long term capital gain.

Your cost basis is the $3000 you paid  plus 1/2 of what you parents paid (for the 3 acres) in 1957 plus 1/2 the fair market value (of the 3 acres) in 1983. 

The 3 acre share of the $15,000 paid, for the whole, in 1957 is close to nothing. The 1983 value isn't much more.  Historical values found on the internet or from the property tax assessor should be close enough for your needs. Just calling your basis $3000 wouldn't be too far off. 

[sheryljo]

Hal AL

The 2015 date is the year that she sold/gave it to me. 

The original home & 3 acres which mom still owned at her death is still for sale (in an estate)

The other land was given to my other siblings (approx 3 acres each) in varying years.  The difference is that my siblings built their primary home on their property but I sold mine.

[sheryljo]

Mom gave me & each of my siblings 3 acres each - they chose to build their primary residences on the land so that is why mine is different....I sold the land after she passed away.  Her house and 3 acres are on the market but still in the estate.

Mom sold/gave my 3 acres to me in 2015 that's why we thought the beginning point would be the fair market value on that date - subtracted from the $190,000 i sold it for. (?)

My tax attorney is sourcing out his 'research' to his 'real estate team' & others so when we last spoke he seemed like he was making up things on the fly.

If we end up paying close to $25,000 in captial gains & another $2,000+ for attorney fees i want to be positive that it gets filed correctly.

Thank you for helping me understand this complicated situation.

Thanks for you help.

[sheryljo]

MarilynG1:

Thanks for your response.

I did not inherit the land - she sold/gifted 3 acres to me in 2015. (Each of us kids got 3 acres each throughout the years) - i just chose not to build my primary home on the land so i sold it.   I was never on mom and dads deed. But received a deed for my 3 acres in 2015.

Mom passed away in 2019 - her house and her remaining 3 acres are still on the market and is in her estate.

im confused why our attorney is using the cost basis for the entire 15 acres including her home...and why it matters what the entire property was worth when dad died in 1983 etc.    i only recieved the three acres in 2015. 

i was thinking i would pay captial gains from the FMV of my 3 acres when i got it in 2015 and the sale price in 2022. (?) 

Thanks again for helping me understand.

[Hal_Al]

Q. i was thinking i would pay capital gains from the FMV of my 3 acres when i got it in 2015 and the sale price in 2022. (?) 

A. That's how it works if you had inherited the property in 2019. The cost basis in inherited property is the FMV on the date of death.  But since you have a combination of purchase & gift, not inheritance, your basis is different. The cost basis of a gift is the giver's cost basis. There is an exception, for the home, if the decedent retained a life estate. But since you only got vacant land, that is unlikely to be applicable. Your attorney would know.

Q. im confused why our attorney is using the cost basis for the entire 15 acres including her home...and why it matters what the entire property was worth when dad died in 1983 etc. 

A. I doubt that he's using that as basis, but only as a starting point for calculating the basis. One common method is to use the current property tax assessment break down percentage between land & building and apply those percentages to the older cost / value.