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Determining basis with inherited vs. gifted property

George SaenzDear Tax Talk,
When my grandfather died, he left me some property. I had interest in half, my grandmother held the other half. Upon her death, the property is now mine completely. They had it set up so I was to "receive" a percentage of the property every year until the death of my grandmother.

Now, if I plan to sell the property, what is the tax percentage I should expect to pay the government? I am selling the property at $600,000.
-- Leonard

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Dear Leonard,
The maximum rate that would apply to the sale of the land would be 15 percent of the gain. Gain is the difference between the selling price and your basis or cost in the property. Since you didn't purchase the property, your basis is determined under a special set of rules that applies to inherited or gifted property. Inherited property has a basis for tax equal to the fair market value on the date of death of your grandfather, the decedent. Since you inherited half the property on his death, your basis in half of the property would be its value at his death.

The basis in the value of the other half depends on how the property was transferred to you during your grandmother's lifetime. First off, let's assume she received her half of the property on the death of her husband, your grandfather. Her basis would then become the same as yours in her half of the property. If she made incremental gifts of this during her life to you, then her cost or basis becomes your cost or basis.

That is, property acquired by gift has the same basis as the person that gave it to you, unlike inherited property which gets a step up in value. Hence it probably would have been more beneficial to you to have inherited the property from your grandmother rather than to have received it as a gift. Assuming the incremental annual gifts, and you wound up with a 100 percent interest in the property prior to her death, your cost for determining gain would be the fair market value at your grandfather's death.

If your grandmother acquired her half when her husband did, then your basis in her half would be its original cost, since the basis carries over in a gift. Since the property seems very valuable and your tax consequences could be quite large, you probably should seek the advice of a CPA prior to the sale. For example, you may want to enter into a like-kind exchange to defer tax on the sale, a move that a CPA can help you analyze, but only if this is done prior to the sale.

-- Posted: May 25, 2005




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