Farm Gift Sale and Timber

[KBTS]

A member of my church approached me for some tax advice on this situation. His parents bought a farm for approx. $30,000 back in the early 1970's. They never farmed it themselves, but did rent out the fields for others to farm. His father passed away about two months ago and since then his mom has been worried about the farm land. So, he agreed to let her transfer the property to him for $1 - I know, terrible tax planning but he did not ask advice about that. The actual value at time of death and now is around $300,000.

1. For the gift tax return that needs filed, would his mom's basis (and subsequently his) be equal to $15,000 (1/2 the purchase price) plus $150,000 (1/2 the FMV at father's death)? This is not a community property state.

2. He is planning to continue to rent out the fields and also to sell some timber. His plan is to pay hourly for the guys to come cut the timber and then so much per truckload to haul it to the mill. He plans on doing the intermediate steps of dragging the lumber out of the woods and stacking it by himself. How should he treat the sale of this lumber? Pub 225 seems to indicate this would be ordinary income on Sch F, but I have read of capital gain treatment in certain circumstances. Any help would be appreciated since I have never done a return with timber tax issues.

Thank

[Snaggletooth]

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My opinion is your approach to the gifted basis is correct. There are some sharp folks on the board that might have suggestions as to how to maximize the mother's basis, but I'm not one of them. I leave an invitation for others to post if they have anything more innovative than this.

The "published" treatment for sale of timber is to treat in one of two different ways:
1) Show as ordinary farming income where the farm is engaged in producing timber, i.e. either Schedule F or Form 4835 or possibly Schedule E.
2) Show as capital gains if the timber is only the product of an investment, and the farm is not selling timber as one of its products. Obviously, this will be the preferable tax treatment 99% of the time.

I've never had a situation that could not apply #2 - capital gains. Even if the sale is split among two years, this still represents growth that has occurred over decades, and obviously this will apply in your situation so long as this is the first timber that has been sold in many years.

There is virtually NO specific timber that is sold in less than 20 years after being set out, and in the case of hardwoods, much much longer than that. However, there ARE certain large farm operations that rotate their stands and are able to sell SOME timber every year. I haven't ever had any farms like that, but if so, they should be reported as described in #1 above.

[peanut]

Gift Sale & Timber

I believe if the father died & the property was acquired before 1976 even though in joint name there is the fractional interest rule in common law states. That is that % of the father's funds used to pay for the farm would be the % of the stepped up basis. If the funds all came from the father's sources it would get a 100% stepped up basis.This would be true for the stumpage also( an allocation should be made ) Many preparers aren't aware of this rule--- you might have to use BNA to research.

[Nashville]

Post by ICOUNT

If anyone can substantiate what ICOUNT is saying about 100% stepped-up basis for the spouse that provides most of the money, please speak up. As he says, this would be a little-known tax break. (I'm assuming ICOUNT is masculine -- gender subject to correction)

Many homesteads for persons now becoming deceased were purchased prior to 1976. I remember vaguely some change in the gift tax law, seems like at the time there was a $40K exemption plus an annual exemption per recipient but all this is foggy. But I didn't remember an allocation of stepped-up basis in proportion to the amount of money provided for the purchase.

If we can find out more about ICOUNT's post, and back it up with citations, this would be absolutely HUGE!! Even if the burden of proof must be submitted (which I suspect would be the case).

[Gene V]

Snagg,

This is not you answer, However a place to start you research.

This is from J.K.Lasser’s Your Income Tax 2005 page 121


The Tax Court and the Fourth Circuit Appeals Court (Maryland, North Carolina, South Carolina, Virginia, and West Virginia) agreed with the Sixth Circuit’s approach of allowing a 100% stepped-up basis for a pre-1977 spousal joint interest where the deceased spouse had paid the entire purchase price. In October 2001, the IRS acquiesced to the Tax Court decision and will no longer litigate the issue..

If the statute of limitations has not expired, a surviving spouse who reported gain on a sale of property using the 50% basis rule should consult with his or her tax adviser about filing a refund claim based upon the 100% basis rule.

[okie1tax]

Consideration equals ownership

I attended a LandGrantTax seminar presented by OSU in Tulsa in 2003 and that was one of the chapters taught. I just went through the chaper again. There is no reference given, but the main thrust was that based on who paid for the item, if before 1977, then that constituted the percentage of ownership.

[Nashville]

1976

A local gentleman whom I have known and admired for many years says he vaguely remembers this. However, he says the decedent must have died before 1977 for this interpretation to be applied. Of course, he doesn't give cites...

[okie1tax]

1977

No, the purchase must have been before 1977. As I said, and I think it is in line with the reference to Lassiter, there was some acceptance by the IRS, apparently between 2001 and 2003, that because many states, other than community property states, considered property brought into a marriage, if obtained before 1977, to retain the providing spouse's ownership/title. As I also said, there was no "Blanketity Blank" cite given, but it was a LandGrantTax school seminar given by OSU and similar universities all over the country so I am pretty sure it is valid. Hope so anyway as I used it when my brother passed away to value the gain my sister-in-law had when she sold the property, i.e., $0.00.

[Nashville]

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[peanut]

Joint Property b/4 1977

5. Gallenstein v. U.S. (6th Cir. 1992) (stepped up basis for pre-1976 joint property):

1. Facts: TP and H bought farm in KY with his money in 1955 for $38K in JTWROS. H “bought the farm” in 1987. TP sold farm in 1988 and claims stepped up basis for entire purchase (and 0 capital gains). IRS argues she can only take a step up in 50% of the property.

2. Issue: Whether the spouse is entitled to a stepped up basis for the entire property when 100% of the value of the joint property was included in the decedent’s GE under the pre-1976 § 2040?
3. Held: Yes. B/c the interest was created prior to 1977, a surviving spouse was entitled to a stepped up basis for joint property where the decedent has provided all of the consideration for the property.