Capital Gains Tax on Gifted Property?

[Mshore]

What is the name of your state? North Carolina
I was given 5 ac. of land by my mother in November 2002. It was land that was given to her by her mother more than 30 years ago. I was planning to build a house on the land, but decided to sell the land and build at a different location. The land is under contract to be sold and I have identified the land that I want to purchase to build my house on. The question is: Do I owe Capital Gains Tax on the land since I'm selling it so close to the time it was given to me? I got no better than the average going price for the land and I will be paying more for the land I am buying.

 

[abezon]

You probably owe taxes, because your basis is not the fair market value of the land when your mother gave it to you. Your basis is whatever your grandmother's basis was -- how much *she* paid for it. You'll need to search the county records & find grandma's purchase price. Anything over that amount is a long-term capital gain for you. (Your 'holding period' goes all the way back to when gram bought the property.) Essentially, you fill out your Schedule D exactly as grandma would if she still owned the land. Same dates, same basis.

The only exception would be if someone made capital improvements after gram bought the land. Examples would include: drilling a well, installing septic/water/power, putting in a driveway, fencing the place, erecting outbuildings.

 

[Mshore]

Are there other ways to avoid the Capital Gains Tax such as filing for a "1031 like-in-kind exchange"? If I had built my new house (using the money from the sale of my existing house) on the land, would I still have Capital Gains Taxes?

 

[abezon]

1031 applies to property held for business use or investment exchanged for like property that will be held kfor business use or investment. You aren't buying the new land for investment; you're buying it for personal use.

Whether property is held for investment is determined by its use for the 2 years before & after the exchange. To qualify under 1031, you'd have to wait 2 years before starting to build your house. Also, 1031 exchanges are very technical. You either have to go through a qualified intermediary or get your buyer to "purchase" the land you want & then give it to you in exchange for the land they want.

Just how much gain are we talking about?

 

[Mshore]

Since I don't know what my Grandfather & Grandmother paid for the land 75 years ago, the basis will be nearly nothing. I got $50k for the land. OUCH!

 

[abezon]

Oh please. I'd be thrilled to pay the taxes on $50,000 of long term gains. Tell you what. You give me the land and I'll pay the taxes when I sell it to your buyer for $50k. No? Are you sure?

So, the question to you is, would you rather pay $10,000 taxes or pay $1,000 in legal fees and wait 2 years to build the new house?

 

[Mshore]

You may not mind giving the government $10,000 for doing absolutely nothing. I just don't believe that they have the right to step in every time you make a dime with their hand out. If I had inherited the land and then built a house on it, there would not have been any capital gains taxes. It's just because I don't want to live in that location that Uncle Sam gets something for nothing. Thanks for the advise.

 

[dgin]

This question is for abezon:

You said above that "Whether property is held for investment is determined by its use for the 2 years before & after the exchange." From the context, I think you mean for purposes of a 1031 exchange.

Where does that rule come from? Do you know where I can get more information about that?

This would answer a question that I posted a few days ago that hasn't been answered yet. Thanks!

 

[abezon]

IRS Publication 544, pp 11-12. http://www.irs.gov/pub/irs-pdf/p544.pdf