If we Inherited 120 acres, selling off 10 acres. Does the Estate pay that step-up or do we need to assign that part of the property to one of us and they pay the step-up?

[jeeppadre89]

We've had a renter on 2 of the acres that would like to purchase that part plus an additional 8 acres. The additional 8 acres have been farm land and recorded as such.

[M-MTax]

The basis of the property is stepped up to its FMV as of the date of death of the decedent.

[M-MTax]

If you are purchasing the acreage from the estate, the purchase price would be whatever can be agreed upon by both parties. The basis for the estate, however, in the transaction would be the FMV on the date of death of the decedent.

If you are selling property you inherited, your basis is the FMV on the date of death of the decedent. Subtract that basis from your selling price to arrive at gain or loss on the transaction.

[NCperson]

@jeeppadre89 what do you mean "pay the step up".  

When you inherited the property, your cost based was determined by the value of the land on the date of the decendent's death. 

Now that you are the owner, if you sell off some of the land, your capital gains is the selling price less the value on the date of death of the decendent.

The estate is no longer involved, so whatever you mean by "does the estate pay the step" is not relevant because the estate is not a participant in this transaction when you sell 10 acres to a third party. 

[jeeppadre89]

The estate still has the property, it is supposed to be divided evenly between all 3 of us.  If we leave it in the estate, can the estate still use the Step-Up or to us the Step-Up, does it have to be given to one of the inheritor's like myself.  I don't want to do that, because then I would  have to claim the capitol expense and claim the income I believe and my health insurance would go up as well.

[M-MTax]

@jeeppadre89 

If the property is sold out of the estate, the estate uses to stepped-up basis to calculate the gain. 

If the property is distributed (in kind) to the beneficiaries and sold by them, then the beneficiaries would use the stepped-up basis to calculate their gain.

[NCperson]

@jeeppadre89 the step-up occured already.  That occured on date of death.  Whether a) the Estate is the seller or b) the beneficiaries inherit and later sell, the same "step-up" occured.  Use the property value on the date of death as the cost basis in either scenario.

Maybe the term "step up" needs to be explained?  that is a good thing and not something that adds to income (so I do not see how it would impact insurance premium determiniation).

Upon death, assuming the estate is worth less than $15 million, there is no estate tax.  All the appreciation that occured from the time your parents originally purchased the land (and other assets) until the date of death is forever forgotten.  And since it is forgotten, so is any capital gains tax related to that appreciation forgotten. 

The capital gains is measured by taking the sales price minus the value of the date of death.  That difference is income.    

I am assuming the owners of the land prior to death was NOT an irrevocable trust - then the rules are different. 

[jeeppadre89]

I appreciate your input, just need to verify that if the estate sells the property, then the estate is responsible for all gains and no individual is docked for capitol gain or has to claim any income. That the estate would distribute any gains with any other inheritance being distributed. Is this correct?

[M-MTax]

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@jeeppadre89 wrote:

....the estate would distribute any gains with any other inheritance being distributed. Is this correct?

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That is the typical scenario; the estate would pass any gain through to the beneficiaries, but there are instances where the estate pays any tax due on its 1041 and distributes the proceeds to the beneficiaries.

Speak with the executor of the will or administrator of the estate (I made the presumption that the property is not in a trust since you made no mention of a trust).

[M-MTax]

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@NCperson wrote:

Upon death, assuming the estate is worth less than $15 million, there is no estate tax. 

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It's $13.99 million for 2025 and estate tax has nothing to do with estate income tax. You're confusing the issue, which is solely the step up in basis. 

[NCperson]

@jeeppadre89 to be clear, the normal scenario would be that the estate pays no income tax on income that occurs after the death of the decedent.  However, the estate reports that income to the beneficiaries and the beneficiaries report that income on their tax return and are responsible for any tax. 

The estate would report the income on form 1041 and supply the beneficiaries with form k-1 to reflect each beneficiary's fair share of the estate's income.  And that form k-1 would be reported on  the beneficiary's tax return.  The beneficiiary would pay any income tax on that income.

But I think you are missing a point somewhere.  if the land is "stepped up" to market value on the date of death and the estate sells off 10 acres shortly thereafter, why wouldn't the value of the 10 acres be just about the same as it was on the date of death and hence very little or no capital gains to report.

The capital gains is the sales price of the 10 acres less the value of those same 10 acres on the date of death. 

are you concerned about something that won't occur?  or is the 10 acres magically worth a lot more than it was on the date of death? 

@M-MTax huh? there is no estate tax if the value of the estate is less than $13.99mm  (2025) or $15mm (2026).  THAT is a totally difference conversation than whether the estate pays INCOME tax.  I am NOT confused at all. 

What is the 'which' you are referring to in your statement that "which is solely the step up in basis".  

[M-MTax]

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@NCperson wrote:

@M-MTax huh? there is no estate tax if the value of the estate is less than $13.99mm  (2025) or $15mm (2026).  THAT is a totally difference conversation than whether the estate pays INCOME tax.  I am NOT confused at all. 

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You wrote "$15 million" in your previous post which would apply to 2026, not 2025. The lifetime exemption would be applicable to 2025 (or earlier), but not 2026, so the exemption is $13.99 million at most.

Also, I'll return your "HUH?" right back to you. If, as you now state it's a "totally difference conversation" then WHY did you even bother to mention it in your post? Again you ARE confused.

[NCperson]

@M-MTax why mention it? because I am not confident the OP understandings the impact of the Step-up on the situation. Asking "does the estate PAY the step-up" doesn't make sense and gives me pause. 

Presumably the estate is worth less than $13.99mm so there is no estate tax. 

And presumably if the land is being sold shortly after the death of the decendent, then the land is being sold quite close to its value on the date of death and there would be little to no capital gains income to report. 

I'll wait to see in a response whether the OP understand that.  I don't understand why he is worried about income that could cause his insurance premiums to be affected if he understands that the sale of the land should not generate much if any capital gains income.

[M-MTax]

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@NCperson wrote:

I don't understand why he is worried about income that could cause his insurance premiums to be affected...

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I can't figure that out, either, unless he's referring to losing a deduction of some sort related to his health insurance premium (Schedule A or otherwise).

[M-MTax]

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@NCperson wrote:

And presumably if the land is being sold shortly after the death of the decendent, then the land is being sold quite close to its value on the date of death and there would be little to no capital gains income to report. 

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There could actually be a loss here if there are selling expenses, but the problem is we don't know how long the property has been in the estate.