Inheriting land contracts.

[Pom]

 I have a message in for our accountants, but I am guessing they might be out for a few days.

Does anyone have experience inheriting a land contract?  We are going ahead with the sale of one of FIL's properties that we are pretty confident we can ONLY sell on a land contract.  It's old, run down and the renters are buying it.  One down, three to go.

So I spoke to the realtor today and he has had someone approach him about buying another parcel (land only) of FIL's that they want to put 35% down on and pay out the balance via land contract.  This might be okay for us.  We have no need of the cash and if we can sell it and the interest is at a higher interest rate, well that could be positive for us.

I am concerned about how all of this would impact us tax-wise.  Both properties were willed to Mr. P but are in probate.

Anyone care to share any experiences or info?  

[Pom]

I assume we pay capital gains that are calculated yearly according to payments received? Anything else I am not thinking of?

[Pom]

Apr 22, 2015 13:56:44 GMT -5 @rennido said:

All I know is you won't pay taxes if you sell the land at price it was worth on the day your FIL died. Anything above that you will be taxed.

This may be for Montana though.

This is what happened when we sold the land H inherited from his grandfather. However, he could only sell it after probate was done. If you want to sell it, it will probably have to go thru the estate.

Mr. P is the Personal Representative (executor) and the only heir, so yes if we move forward it will be part of the estate until it is closed by probate court.  We want to get the rental closed now, we could wait on the land.  Won't capital gains be on what the value of the land when FIL purchased it or am I confused?  

[ladyk]

*this isn't tax advice*

en.wikipedia.org/wiki/Stepped-up_basis

Once it's out the estate, he should be able to get a step up in basis so he's only paying on the value when he inherited it for federal tax purposes. For state? Not sure as I'm not sure if they have a similar law.

This is why you really need to be careful if you're deeding away property before you pass. If it got deeded before you pass, then the new owner would have carry over basis which would be what the original owner paid for it and you'd have to pay tax on the difference between the carry over basis and the fair market value/what you sell it for.

[Pom]

Apr 22, 2015 14:22:43 GMT -5 ladyk said:

*this isn't tax advice*

en.wikipedia.org/wiki/Stepped-up_basis

Once it's out the estate, he should be able to get a step up in basis so he's only paying on the value when he inherited it for federal tax purposes. For state? Not sure as I'm not sure if they have a similar law.

This is why you really need to be careful if you're deeding away property before you pass. If it got deeded before you pass, then the new owner would have carry over basis which would be what the original owner paid for it and you'd have to pay tax on the difference between the carry over basis and the fair market value/what you sell it for.

Thank you.  This helps me ask the right questions

We are also meeting with my mom's attorney this summer.  There is a trust of some sort that has land in it that has been passed down from my grandparents.  I am scared to death of the tax ramifications of that since we are talking about 700 acres of valuable farm land.  We really need to have someone sit down and walk us through this before we get overwhelmed.   

[ladyk]

I would absolutely get someone to talk to about this. Between Mr. P's father's properties and now the trust from your side, a professional will be able to help you understand all of the tax ramifications and figure out a path for you and Mr. P.

[sicilygirl]

Pom

Yes, you will get a "step up in basis" to what the land was worth on the date of your father-in-law's death. If you're not getting it appraised, you might consider using the value on the tax rolls for 2015 as your basis.

For the installment sale, you would be taxed on a percentage of the amount of principal you receive each year (this might be a very small percentage due to the step up in basis). It would be considered a long-term capital gain and taxed at the lower capital gain rates. You would also be taxed on the interest you receive each year at your ordinary rate.

[Pom]

Apr 23, 2015 9:41:32 GMT -5 sicilygirl said:

Pom

Yes, you will get a "step up in basis" to what the land was worth on the date of your father-in-law's death. If you're not getting it appraised, you might consider using the value on the tax rolls for 2015 as your basis.

For the installment sale, you would be taxed on a percentage of the amount of principal you receive each year (this might be a very small percentage due to the step up in basis). It would be considered a long-term capital gain and taxed at the lower capital gain rates. You would also be taxed on the interest you receive each year at your ordinary rate.

Thank you for your response!  I imagine that my accountants are out for a few days this week too.  This is kind of what I thought but I wanted to check.  

Glad you survived tax season and I hope you find your glasses.

[sicilygirl]

Apr 23, 2015 19:39:36 GMT -5 Pom said:

Apr 23, 2015 9:41:32 GMT -5 sicilygirl said:

Pom

Yes, you will get a "step up in basis" to what the land was worth on the date of your father-in-law's death. If you're not getting it appraised, you might consider using the value on the tax rolls for 2015 as your basis.

For the installment sale, you would be taxed on a percentage of the amount of principal you receive each year (this might be a very small percentage due to the step up in basis). It would be considered a long-term capital gain and taxed at the lower capital gain rates. You would also be taxed on the interest you receive each year at your ordinary rate.

Thank you for your response!  I imagine that my accountants are out for a few days this week too.  This is kind of what I thought but I wanted to check.  

Glad you survived tax season and I hope you find your glasses.

Thanks so much! And I did eventually find my glasses, haha!