Q: How do we determine the cost basis for a piece of land and what is the most tax efficient way to sell the land?
Person A purchased a tract of land in 1970. In 1979 Person A formed a Revocable Living Trust and transferred the land to the Trust. Person A was the Trustee and Beneficiary of the Trust during his lifetime. The Trust named A's three children as Successor Beneficiaries. Person A died in 1985. Since Person A died the land has been continually owned by the Trust. The Successor Beneficiaries now wish to sell the land and expect there will a substantial increase in value. First question is what year's value should be used to determine the cost basis for any taxable capital gains? Second question is what is the most tax efficient way to sell and distribute the proceeds? Should the land be sold by the Trust with the Trust paying any capital gains tax due and then distributing the proceeds to the Beneficiaries or should title to the land be transferred from the Trust to A's three children and then sold with each person paying any capital gains tax due.
A: There are several very important IRS tax questions presented here; and the several (alternative) legal answers would require the professional services of an experienced CPA and an experienced tax lawyer--working together--to spend at least 15 to 20 hours meeting with all three clients and then researching current Kansas law and writing a professional legal opinion that could be used--just in case the IRS shows up looking for money later. So, if the answers are worth paying about $10,000 to a CPA and tax lawyer, the three siblings should hire them.
A: This is challenging because you would likely have to look at the law in place in 1985. The 1986 tax reform may have changed the answer. Today you would probably look at cost basis as FMV at time of death where the trust becomes irrevocable. Was the land appraised at the time in 1985 if FMV as basis is the right answer? And then for the second question, you’d have to look at the current law and evaluate all possible scenarios to see what would minimize tax, and for whom. And take potential conflicts into account when advising the three beneficiaries. Definitely need a careful analysis here by a local lawyer and/or accountant.
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