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My FIL died in 2004 and left his leased farm property to my husband and his brother (Tenants in Common). My MIL retained a life estate (rental income) on the property until December 2016, when we (husband and BIL) bought out her life estate interest. She died in April of 2017.
MIL had no estate at her death. She was in a nursing home for almost 10 years and her house was sold to cover the difference in LTC policy benefits and nursing home care costs.
We are considering selling the property because the lease is up for renewal and the rental income yield is low compared to value of the property. We are also considering a 1031 exchange of my husband's half of the property to another rental property.
We are getting conflicting advice from FIL's estate attorney and our CPA on the cost basis of the farm.
What is the cost basis of the property? Is it the appraised value at the time of FIL's death (2004) or does it qualify for a stepped up basis of the property value at the time we purchased the life estate in 2016 and gained control over the property?
I think I have the answer but this is not in my area of expertise Basis = The 2004 appraised value plus what you paid for the life estate in 2016.
No step up in basis in 2016.
The basis you would assume is at the date of death in 2004. (plus any improvements you made to the property since then) Any appreciated value from 2004 until today would be your recognized (realized) gain.
I think I have the answer but this is not in my area of expertise Basis = The 2004 appraised value plus what you paid for the life estate in 2016.
No step up in basis in 2016.
Quote:
Originally Posted by 49erfan916
The basis you would assume is at the date of death in 2004. (plus any improvements you made to the property since then) Any appreciated value from 2004 until today would be your recognized (realized) gain.
Thank you both.
Can we add in the cost of improvements the tenant made to the farm (done in exchange for a more favorable lease agreement)? The tenant has been leasing the land for 30+ years.
Can we add in the cost of improvements the tenant made to the farm (done in exchange for a more favorable lease agreement)? The tenant has been leasing the land for 30+ years.
Probably not. The reason would be that you did not pay income tax on the amount you reduced the lease.
Can we add in the cost of improvements the tenant made to the farm (done in exchange for a more favorable lease agreement)? The tenant has been leasing the land for 30+ years.
Probably not. The reason would be that you did not pay income tax on the amount you reduced the lease.
By the way what did the CPA say. I would think he should have a better area than the attorney.
Probably not. The reason would be that you did not pay income tax on the amount you reduced the lease.
By the way what did the CPA say. I would think he should have a better area than the attorney.
Thank you.
The only reason I questioned it is because the attorney has been the family attorney for 40 years. He has a lot of experience with farm properties. My husband's extended family owns a lot of land.
My CPA said the 2004 appraised value would be the cost basis. He said we could not write off what we paid for the life estate against the income or add it to the cost basis if/when we sell.
Would the long term capital gain tax be 15% if we do not do a 1031 exchange?
... What is the cost basis of the property? Is it the appraised value at the time of FIL's death (2004) or does it qualify for a stepped up basis of the property value at the time we purchased the life estate in 2016 and gained control over the property?
Any advice would be appreciated.
In 2004, the Cost Basis was the appraised value.
Every year after that the Cost Basis should depreciate some, AND every year some material improvements should be made to the property to bump the Cost Basis back up.
The Cost Basis needs to be monitored every year, year to year.
Without that kind of documentation, you are lost.
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