Q: What's the best thing to do to avoid big tax liability on land inherited 50 years ago?
My mother-in-law owns a large tract of land in Iowa with her sister. Her sister recently died, so her portion will be inherited by her 3 children. My mother-in-law wants to know the best thing she can do with her portion. She's worried if she decides to sell her property, she will be paying huge capital gains tax. My MIL is now 83 and she inherited this property from her mother around 50 years ago and the value is now big. She now lives in Indiana. What do you think should be her best move here? She has 3 children who stand to inherit from her when she passes away.
What would be best to minimize, if not avoid, paying huge tax?
If she donates the property to her children inter vivos, what would be her tax liability? How about the donees/kids?
I would appreciate any advice. Thanks.
A:
There are a few strategies your mother-in-law could consider to minimize tax liability on the inherited land:
1. Step-up in basis: If she holds onto the property until her death, her children will receive a "step-up" in cost basis to the fair market value at the time of her death. This means if they sell soon after inheriting, they would owe little to no capital gains tax.
2. Gift the property: She could gift portions of the property to her children over time, taking advantage of the annual gift tax exclusion (currently $18,000 per recipient per year for 2024). This gradually transfers ownership without incurring gift taxes. However, the children's cost basis would be the same as hers, so they could face significant capital gains tax if they later sell.
3. Put the land in a trust: Placing the property in certain types of irrevocable trusts can remove it from her estate, potentially reducing estate taxes. The specific implications depend on the type of trust.
4. Sell the property and take advantage of tax breaks: If she sells, she could offset some capital gains by utilizing the home sale exclusion (if she lived there 2 of the past 5 years), investing in a Qualified Opportunity Zone, or completing a 1031 exchange into a "like-kind" investment property.
5. Donate to charity: Donating the land to charity would provide an income tax deduction and avoid capital gains tax, but obviously the land wouldn't go to her heirs.
The best approach depends on her specific circumstances and goals. I'd strongly recommend she consult with an estate planning attorney and tax professional to evaluate her situation in detail, as there are complex legal and tax nuances to navigate. Getting personalized expert guidance is crucial for a decision of this magnitude.
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