What are the tax benefits/disadvantages of selling land in MN before vs. after the owner's death.

Question

My elderly mother wishes to sell lakefront property (never used as a primary residence) and divide the proceeds between her adult children. She is 90 yrs old and in a nursing home. The children wish to know if it is prudent financially to sell it now or better to wait until she passes. She has $500,000 in investments for her continued care. The property was purchased in the 60's from her husbands parents for $1. They made no improvements. Her husband has passed. The land is considered unimproved although there is an old cabin on it. What are the tax ramifications  of selling before vs after her death?

Scott Maki · Answer

Thanks for your question. And it was good for you to ask BEFORE selling the property, because there IS a big tax disadvantage to selling the property now - it's called "step-up in basis." 
 
If your mother sells her home now and does not buy a replacement, she will likely lose the homeowners exemption for capital gains on the sale. 
 
If they only paid $1 for the land, then her "tax basis" on the property is $1. Therefore, if land the land is now worth $50,000 (just a hypothetical number), and she sells it for $50,000, then there would likely be capital gains tax on the $49,000 increase in value. 
 
HOWEVER, if she were to gift the land by Will - or better yet, by placing it in a Trust - the beneficiary(ies) would receive the property with a "step-up" in the tax basis. Meaning they would receive it with the tax basis of the fair market value at the time of her death (OR at exactly 9 months after her death - whichever is more advantageous) . Therefore, for example, if she gifted it to you and your siblings, you would receive it with a tax basis of $50,000 (the hypothetical fair market value of the land I used for this example). THEN if you all decide to sell it for its fair market value of $50,000, you would pay NO capital gains tax. 
 
DISCLAIMER: I am NOT a tax professional. Consult a professional tax consultant to verify any statements made here. 
 
I hope I answered your question. 
 
Good luck!

Scott Maki · Answer

My apologies. I referred to the "homeowners exemption" in my response - but you clearly stated that this was not a homestead. Please disregard that reference. That is a subject that often applies to sale of property by elderly clients - but didn't apply here. 
 
The remainder of the "step-up in basis" explanation still applies to the capital gains on the sale - simply disregard the sentence "If your mother sells her home now and does not buy a replacement, she will likely lose the homeowners exemption for capital gains on the sale. " 
 
Thank You

Q: What are the tax benefits/disadvantages of selling land in MN before vs. after the owner's death.