Update Your Tax Bais Upon Inheriting Land

You’ve just inherited land—now what? First, you need to establish the basis of the property, or the investment value of the asset. This is the amount you will use for tax purposes to determine your capital gains or loss if you sell the ground.

Your basis is adjusted over time to include depreciation, amortization, depletion, casualty losses and any gain or loss on the sale, exchange or other disposition of the property. The higher your basis, the less gain there is to be taxed, and therefore, the lower your tax bill. Your basis depends on how you get the property in the first place and what adjustments have been made since taking ownership.

The basis of property inherited from a decedent is generally set by one of the following:

  • The fair market value of the property at the date of the individual’s death.
  • The fair market value on the alternative valuation date, if the personal representative from the estate chooses to use alternate valuation.
    • An exception applies only when an estate is large enough to file a federal tax return. The exception can set the basis of inherited property at its value six months after the owner died, or on the date of sale if sold during that six-month period. Using this exception (called the alternate valuation date) could make sense if the value of the estate’s assets has fallen during the six months following the owner’s death. If the executor of the estate chooses to value assets using the alternative valuation date for estate tax purposes, the value on that date becomes your basis.
  • The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes.
  • The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement.

To establish the basis, you should hire a rural property appraiser with experience in valuation of your property type. A rural property appraiser will collect property and market information, analyze comparable sales, visit with the current operator, perform a site inspection and value the property using the cost, income and sales comparison approach. Afterwards he or she will reconcile the values to derive a revised value that can be used to update the basis of the inherited property.

Too often, a landowner will keep inherited property for several years before selling and never establish a basis. This is not recommended due to lost opportunities to use the tax code for items such as depreciation of improvements. Additionally, a retrospective value will have to be set for the basis—this is an opinion of value of the property on a specified historical date. What makes this more expensive and difficult is the passing of time and accuracy as comparable sales and conditions of the subject property are harder to identify and verify.

Once the basis is established for your new property, you can then decide what you actually want to do with your inheritance. There are two options: keep or sell. If you keep the property, identify if an improvement can be depreciated under the tax code. Should you decide to sell the property, you will know the basis and can work with a land broker and CPA to estimate cash proceeds after all closing costs and capital gain taxes or proceeds available for a 1031-exchange.