Capital Gains on Land Sale

[tucker 238]

Any way to reduce? Long story short is that my parents received land from their parents prior to death due to mental capacity issues. 

My parents want to sell the land but don't necessarily need the cash. The cost basis will be ridiculously low as it wasn't reset at time of transfer since it was executed prior to my grandparents death.

Are there other strategies besides 1031 exchange?

[phdhorn 6224]

I'm going through something like this now.  Isn't stepped-up value in play here since they're heirs?  Should be(?)... and should make a huge difference.  It would seem to me that the value of the land should be what it is deemed now, not what it might have been worth when they inherited it, and the capital gains (or losses) based on that much narrower margin.

Edited April 3, 2019 by phdhorn

[tucker 238]

9 minutes ago, phdhorn said:

I'm going through something like this now.  Isn't stepped-up value in play here since they're heirs?  Should be(?)... and should make a huge difference.  It would seem to me that the value of the land should be what it is deemed now, not what it might have been worth when they inherited it, and the capital gains (or losses) based on that much narrower margin.

My understanding which is limited is that my parents can't claim step-up value as the property was transferred prior to death.

[phdhorn 6224]

4 minutes ago, tucker said:

My understanding which is limited is that my parents can't claim step-up value as the property was transferred prior to death.

But if they were deemed to be mentally incapacitated, that should also make a difference?  Guess it's time for a tax/estate lawyer... they should be able to give you an answer for less than your firstborn child.

[Chewbacca 7787]

1031 is the only way to avoid it that i know of.  Lots of rules.  Make sure they don't fuck up or it can get blown up.  

[UTPhil2006 3817]

21 minutes ago, Chewbacca said:

1031 is the only way to avoid it that i know of.  Lots of rules.  Make sure they don't fuck up or it can get blown up.  

This.  Where is the land located?

[TwiceHorn 31540]

1 hour ago, tucker said:

My understanding which is limited is that my parents can't claim step-up value as the property was transferred prior to death.

Correct.

[Dbeasy 15094]

You sure the parents didn’t transfer it as a gift under the lifetime estate tax exclusion?

[tucker 238]

13 minutes ago, UTPhil2006 said:

This.  Where is the land located?

Middle of nowhere. Near Waco 

[TwiceHorn 31540]

27 minutes ago, Dbeasy said:

You sure the parents didn’t transfer it as a gift under the lifetime estate tax exclusion?

This would address the taxability of the first transfer, not the basis on the subsequent one.  At least AFAIK.  Gifts get no step up as a general proposition.

[NeverMarryAStripper 21932]

1 minute ago, TwiceHorn said:

This would address the taxability of the first transfer, not the basis on the subsequent one.  At least AFAIK.  Gifts get no step up as a general proposition.

Might get some if there was actually gift tax paid, but not if transferred using the lifetime exclusion

[Kennythetiger 9474]

If they don't need the cash, why not hold on to it until you can inherit it and re-set the basis?

[Reagan1k 3024]

Yep - Let them die with it if they don't need the cash - Basis steps up and heir can sell with no tax hit.  If the proceeds would be passed on to said heir(s) anyway it passes the entire value without taxation.

If on the other hand we aren't talking about a huge some of money and the carry-cost of the land with taxes and maintenance is high, sometimes paying taxes on an asset sale is a win, all things considered.

[Brisketexan 105402]

3 hours ago, tucker said:

Middle of nowhere. Near Waco 

Have you thought of building a compound on it?  I hear that really enhances the value.

You should probably install a pretty stout sprinkler system, though.  Just in case.

[Dbeasy 15094]

This would address the taxability of the first transfer, not the basis on the subsequent one.  At least AFAIK.  Gifts get no step up as a general proposition.

An appraisal prior to transfer while the grand parents were still alive would raise the value of the gift, wouldn’t it? Not sure.

[TwiceHorn 31540]

22 minutes ago, Dbeasy said:

An appraisal prior to transfer while the grand parents were still alive would raise the value of the gift, wouldn’t it? Not sure.

Don't think so.  Gift recipient gets donor basis.  I think there may be something to the notion of having paid gift tax lowering the gain/raising the basis by the amount of gift tax paid, but am not sure, and no one pays gift tax so it goes against annual exclusion and estate tax exemption 99.9% of the time and probably here.

[Apep 645]

If it is all capital gains, invest the proceeds in a Qualified Opportunity Zone fund.

[ChiTownDoc 21170]

9 hours ago, tucker said:

Any way to reduce? Long story short is that my parents received land from their parents prior to death due to mental capacity issues. 

My parents want to sell the land but don't necessarily need the cash. The cost basis will be ridiculously low as it wasn't reset at time of transfer since it was executed prior to my grandparents death.

Are there other strategies besides 1031 exchange?

Hmmm, may qualify for opportunity zones but not sure if that would count as more traditional real estate which would not qualify for OZ.  But you should definitely ask. 

[ChiTownDoc 21170]

19 minutes ago, Apep said:

If it is all capital gains, invest the proceeds in a Qualified Opportunity Zone fund.

Cap gains from real estate don't qualify is what we were told?  Not sure, maybe that's if it's real estate out of a 1031 exchange.  

We are doing a lot in OZ.  No brainer. 

[Apep 645]

15 minutes ago, ChiTownDoc said:

Cap gains from real estate don't qualify is what we were told?  Not sure, maybe that's if it's real estate out of a 1031 exchange.  

We are doing a lot in OZ.  No brainer. 

It's land so it's not depreciable. It doesn't sound like stock in trade. It also doesn't sound like it was used in a trade or business. So it would appear to be a 1221 capital asset. You're probably thinking of 1231 gains treated as capital for other types of assets.

[ChiTownDoc 21170]

12 minutes ago, Apep said:

It's land so it's not depreciable. It doesn't sound like stock in trade. It also doesn't sound like it was used in a trade or business. So it would appear to be a 1221 capital asset. You're probably thinking of 1231 gains treated as capital for other types of assets.

Pretty sure you're right.  Polsinelli has been great at advising but it feels like any benefit will be eaten up by their legal expenses.  Only half joking.  Fuck. 

[Brew 3049]

Gifts prior to death do not get a step up in basis. Original basis transfers and it is what it is. If there was a life estate maintained then there may be an argument. Too many attorneys advise transfers and trusts and lose out on basis adjustments at estate.

ChiTown, that doesn’t make sense. Real estate gains can be rolled into a QOZ. That is the basis of the establishment of the QOZ’s.

[Redpuma 146]

Bump. Any way to (loop holes included) to do a 1031 exchange to buy a primary residence. 

[Guest Lobo]

Yeah, you take the recapture of gains and you buy that house.  Only, unfortunately it's a rental that you just can't seem to rent at current market rates.  Meantime, as you well remember you've living in a 1/1 apartment across town as you settle into the new marketplace. 

[Chewbacca 7787]

Bump. Any way to (loop holes included) to do a 1031 exchange to buy a primary residence. 

No. Unless you like having the IRS up your ass.

[Brew 3049]

4 hours ago, Redpuma said:

Bump. Any way to (loop holes included) to do a 1031 exchange to buy a primary residence. 

No.

[Gil Bang 26040]

Bump. Any way to (loop holes included) to do a 1031 exchange to buy a primary residence. 

the only thing you can do is buy a home and rent it to your brother-in-law, and have your brother-in-law to rent his home to you.

Shady as fuck but you probably get away with it