Q: My parents deeded land to me and my siblings 10 years ago, and reserved a life estate interest for themselves. Our last surviving parent died in November 2009. In an earlier post, you explained that we wouldn't have a taxable gain when we sold the land if the sale price was no greater than the land's market value when we inherited it.
My siblings and I sold the property in May of 2010. Now, as I start to prepare information for my income tax return, I'm not sure how to show that no capital gain is realized on my portion of the sale.
How do I file my tax return? I assume I need to show on the tax return that the transaction took place, even though no tax is due. Is that correct? –KF, via email
A: Yes. You report the sale on your tax return, and show that there was no taxable gain.
As I explained in the earlier post, you inherited the land at its market value.
After the sale, you should have received a Form 1099-S stating the amount that was paid to you at the closing. This form might have been sent to you by the mortgage company, or the bank, or the purchaser's attorney, or even the title company. The same firm also sent a copy of Form 1099-S to the Internal Revenue Service, reporting the amount you received.
You report the sale on Schedule D of Form 1040, says Alan E. Weiner, senior tax partner emeritus at Holtz Rubenstein Reminick in Melville NY.
'Date of purchase' in this case is the date of your last parent's death in November of 2009 -- the date you inherited the land.
‘Date of sale’ and ‘Sale Price’ are self-explanatory.
‘Cost or other basis’ is the land's market value at the date of your second parent's death, plus whatever expenses you incurred in selling the property.
The last column on Schedule D is 'Gain'.
If there is a capital gain, it will be a long-term gain even though you sold the property less than 12 months after inheriting it. "Anytime you inherit property and sell it, it's automatically a long-term transaction," Weiner explains. (To make sure the IRS computer doesn't mistakenly flag a sale of inherited property as a short-term transaction, you can simply write 'INHERITED' on Schedule D instead of setting down a date of purchase, notes Barry C. Picker, a Brooklyn NY tax accountant.)
If the land’s market value at the date of death is the same or lower than the sale price, there is no gain. In the current environment, that seems more than likely! Still, it’s a good idea to get an appraisal of the date-of-death market value as back-up in case you're ever audited.
You don't have to spend several thousand dollars on a formal appraisal unless this is a major financial transaction, Weiner says. You probably don’t need more than a letter from a local real estate broker estimating the land's value at your late parent's death. Keep that letter as documentation.
This is all quite straightforward if you and your siblings each received a Form 1099-S stating his/her share of the proceeds. But it’s possible that only one Form 1099-S was issued for the entire sale proceeds. Let’s say that's what happened -- and that the 1099-S for the whole amount has your name and Social Security number on it.
Of course, the property belongs to all of you and you shared the proceeds equally. But you mustn't confuse the IRS computer by reporting a different amount from the one on the 1099-S, says Weiner.
Here's what you do:
Report the full sales price on Schedule D, as it appears on the Form 1099-S. On the next line, write, "See note, attached."
On Schedule D, subtract the amount you're not responsible for. For example, if the total sale was for $300,000 and your share is $100,000, under ‘Sale Price’, you write '$300,000’ and under that you write ‘minus $200,000'.
In a note attached to the return, explain the situation. For example:
Keith Franklin, Paul Franklin, and Mary Franklin inherited X acres of land at Y location, on November 12, 2009. They sold it on X date 2010. The Form 1099-S was issued only to Keith Franklin. Paul Franklin and Mary Franklin are two-thirds owners, and they have reported two-thirds of the sale proceeds on their tax returns. Your note should include Paul and Mary's Social Security numbers and addresses.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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