Determining Stepped-up Basis

[LindaK]

My client's mom passed away Nov. 07, leaving 700 acres farmland to her 5 kids. The land was sold April of 2008 for $2600/acre. Is that near enough, timewise, to the date of death to be considered the stepped up value?

There was an appraisal done prior to her death (June, 07) on one parcel (186 acres) which resulted in a valuation of $2000/acre. So some of the children are thinking they'll have 600/acre capital gain on their share. Other point to nearby land which sold for $2900/acre in January 2008 and say there should be no gain on the sale.

Are there any definitive guidelines on this or is it a judgement call?

Thanks in advance for your help.
Linda

[Snaggletooth]

Land of Permafrost

Thanks for participating with us from Minot, ND.

This is a tough question. I can't imagine property ANYwhere being worth more than it was in 2007, but North Dakota might be different.

From standpoint of reason, if this happened with TN land, I would agree with the family. However, I don't think I would file that way since the earlier appraiser had his results documented. If an estate tax return was filed with the appraiser's numbers, I would use his numbers and portray a capital gain of $600/acre.

If the appraiser was competent, the backbone of his technique would be to examine other sales of similar property within an acceptable geographical location. There could be other reasons for this seeming inequity. The land sold at $2900/a. could have mineral rights associated, and land valued at $2000 could be just farmland.

I would stick with the documented information, and suggest that if the family has a real beef with paying on $600/a gains, they might have cause against the appraiser. Don't know that they could prevail, but this is really between them and the appraiser. So long as you simply pour your tax return into the mold that has already been fixed.

[LindaK]

No Estate tax return was filed. The question I have with the appraisal is that is was only for about 1/4 of the land.

[joeljj]

$600 seems a little high

A $600/acre capital gain on ND farmland between Nov. 2007 and April 2008 seems too high. I can't believe a 30% gain in less than 6 months. I would check for other land sales in the nearby area closer to the Nov. DOD if possible, or perhaps have the family hire an appraiser for an estimate of the Nov 2007 value.

[Gretel]

Since both, the appraisal and the actual sale is about the same time span away from the DOD I would be comfortable with $2,300. BUT only after educating the client about risk of disallowance and possible penalty and interest due. They should have done another appraisal as of DOD.

Maybe they can get a good professional opinion from an real estate agent, in writing.

[Snaggletooth]

Not our area

Technical information such as an appraisal should not be a number that a tax preparer should assign. The responsibility for such a number should rest with the taxpayer. They will try to drag you into the middle, but the tax preparer should avoid this at all costs.

It is not up to the tax preparer to research land values. The burden should be on the taxpayer, and if they want to reduce their exposure they can hire an appraiser. The tax preparer should not, however, report some ridiculous number that cannot be sustained on its own merits.

[Jiggers]

Estate Tax Return

No Estate tax return was filed. The question I have with the appraisal is that is was only for about 1/4 of the land.

Shouldn't have an estate tax return been filed?

Is there a Federal and/or State inheritance tax due?

[travis bickle]

It seems that this

could be handled differently IF the alternative date of valuation method was chosen by the estate.

Notice this section snipped from a longer article:
How about when assets are sold before the alternative date?

If… The alternative date of death valuation method is selected for estate purposes.

Then… All of the estates assets values and cost basis’s change to the value on their alternative date.

If… Assets are sold after death, but before the alternative date of death date.

Then…The valuation and tax cost basis is the value the asset was sold at.

(the full article is at - http://www.estatesettlement.com/taxcostbasis.php )

Hope this helps

[LindaK]

could be handled differently IF the alternative date of valuation method was chosen by the estate.

Notice this section snipped from a longer article:
How about when assets are sold before the alternative date?

If… The alternative date of death valuation method is selected for estate purposes.

Then… All of the estates assets values and cost basis’s change to the value on their alternative date.

If… Assets are sold after death, but before the alternative date of death date.

Then…The valuation and tax cost basis is the value the asset was sold at.

(the full article is at - http://www.estatesettlement.com/taxcostbasis.php )

Hope this helps

I saw this provision too, but can it be used if no estate return was filed? The total estate is under $2Million.

[Bucky]

If I was the taxpayer I would feel comfortable with zero capital gain. Date of death and sales date less than 6 months and the market value of farm land would not of changed in that short period of time. I don't know why they would not of had it appraised for DOD value. I would try to find a few more comparable sales to backup the zero capital gain. That said it is thier job to come up with basis.