Dear Tax Talk,
I inherited one-fifth of a parcel of vacant land in Florida. The property should have had a fair market value of $21,000. However, it was declared a flood zone buffer by the county wetlands division and nothing could ever be built on it.
The estate received about $7,890 for the property from the Florida county. As 1 of 5 beneficiaries of the property, the county issued me a 1099 for $1,700. Do I have to report the money from the sale of inherited property to the IRS?
Yes, you are going to have to report the $1,700 that was on the Form 1099 issued by the county. However, let's review the tax ramifications to you when you do report the sale.
The general rule is that when you inherit the property, you receive a step-up in basis to the date-of-death value, which is used to calculate your gain or loss on the sale.
Let's go through your situation and what you need to do:
- First of all, this property sale should be reported on Schedule D, Capital Gains and Losses under Part II, which is where you report long-term capital gains and losses because inherited property is considered by the IRS to be held "long term."
- Your proceeds will be the $1,700 that was reported to you on Form 1099, and that amount goes on line 8, column (d).
- On line 8, column (e), "cost or other basis," you will report the step-up in basis amount, which is the fair market value of the property as of the date of death of the person who left you this property.
- Since you inherited only 20% of the property, be sure that you report the stepped-up basis on only your portion.
- Finally, the difference between the $1,700 in proceeds you received and your stepped-up basis will be reported as a gain or loss on line 8, column (h).
I hope this information helps you report the transaction correctly. Thank you for the great question and all the best to you.
Ask the adviser
To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.