Inheritance or Capital Gain?

Question

In 1986 my mother passed away suddenly with no individual will - only my parents' joint will. This year my father sold all of her land (for $85k) in Louisiana (we live in MS) with the plan of paying the capital gains tax and giving the proceeds to all of us, his children (who would then pay taxes too being over $11k). According to Louisiana law (Napoleanic code?), since there was no will, the proceeds of the sale go to the children - all now in their 40s not the spouse. Each will get about $27k. My question is, in April of '07, on my '06 taxes, will this be counted as a tax-free (I think if under $2 million) inheritance or will I need to get a record of its appraised price in '86 and pay capital gains tax on the proceeds using a cost basis on the price difference from '86 to '06?

Answer 1

From your statement about Louisiana law, I assume you mean that title to the land automatically passed to you and your siblings upon your mothers death. Even though you said your father sold the land, you said that you were entitled to the proceeds, so I assume this means you and your siblings legally held title.

If this is correct, then you received an inheritance of an undivided interest in the land in 1986. Your cost basis in the land is the value on the date of your mother's death (so yes you do need to know what it was worth back then). The gain from the sale is NOT tax-free to you. The $2 million you refer to is an estate tax exclusion which is entirely separate from income tax. The total taxable capital gain will be $85k less the cost basis (i.e. the value on the date of your mother's death). Each of you and your siblings will be taxed on only your one-third shares. The federal tax will be 15%. You will also need to file a Louisiana tax return since they will also tax you on the gain. If MS tax rate is higher than Louisiana, the MS will hit you for an additional tax to the extent of the difference.

Also, if my first assumption is correct, your father will not have given you a gift since the money wasn't his in the first place - so the gift tax on gifts over $11k/yr ($12k now) would also not apply.

Answer 2

Your question is confusing. You say there was a joint will, then you say there was no will -- which is it? If there was a joint will, what did it say should happen to her property if she died before her husband?

I infer that under Louisiana law you believe your father had a life tenancy or usufruct in the property, which terminated upon sale, leaving the proceeds in the hands of the children? There are too many unknowns here for me to really come to grips with the issue.

In general, property you inherit takes a new cost basis equal to its fair market value on the date of the decedent's death. If you later sell it, the difference between the proceeds of sale and that basis is taxable gain. These principles should apply to the situation you describe, even though your father may have had the use of the property for a period of years.

l can offer no guidance on the application of Louisiana or Mississippi inheritance tax. However, the federal estate tax consequences should have ended when her estate was closed. Your receipt of the proceeds of sale should not have any estate tax consequences.

You should consult a qualified tax advisor for complete advice.

Answer 3

There's no capital gains tax on an inheritance. Your "cost basis" is the price at time of death. Say your mom bought the land for 10k and it was sold after her death for 85k. You pay no capital gains tax. There is an inheritance or estate tax which kicks in after 2 million or so (not sure the exact amount), but your inheritance should not go over that. But if your dad had title to the land and sold it, then the situation may be different.

Answer 4

The tax section you involved is the gift tax, only the person who gives the gift have tax implication. Since you did not get any boots (cash) from the land the basis should remain as the original cost. According to your question, your father already paid the capital gain, you should not have any tax liability.

You should also check on the unified credit on the tax code, all of us should have something like 560k tax exclusion if they give cash or property to others which means you can give about 1.5mil worth of property or cash to others without paying any tax.

You should consult your tax advisor about the gift tax, and unified credit and the tax implication of the inheritance of the land.

Answer 5

You need to check with a tax accountant. If your father sold the land and it was in his name, you are not receiving an inheritance. from your mother. The money you receive is considered to be a gift from your father and may be subject to gift tax.