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booray · Oct 24, 2012, 07:20 PM

Man inherited farmland from father inlaw. Land was originally meant to go to the deceased's daughter but she had preceded him in death. The man who inherited it deeded it directly to his 3 adult children (the grandchildren of the deceased former landowner). AT the time, the land was valued at 3 times what it is now valued. Children must sell it now. There will be a 65% loss based on the fair market value at the time of the inheritance versus what the land will bring today. Is there any sort of tax write off such a loss? The loss will be in the range of $150,000 to $200,000, divided between the two owners.

ebaines · Oct 25, 2012, 06:08 AM

When the man inherited the property his tax cost basis was the fair market value (FMV)) of the properrty at the time of the father-in-law's death. Then when he deeded the property to the grandchildren that is considered to be a gift. He should have filed a gift tax form to report the value of the gift - even though no gift tax was due unless the value of the gift was in quite substantial - in excess of $1 miilion. (I am assumning here that the man did not use a procedure of declining his inheritance.)

When you sell something that was gifted to you the tax cost basis depends on whether the FMV of the property when gifted is less or greater than the gifter's cost basis. It seems in this case that the property was given away very shortly after the father-in-law's death, so assuming that there was no change in FMV between the date of death of the father-in-law and the date the mand gifted the property, then the cost basis is that FMV.

Because the property is sold at a loss there is no capital gains tax due. The bad news though is that you cannot claim a loss on the sale of personal property (I assume that the property was not rented out and that it was not the principal residence of either of the grandchildren). So there's no tax break here. However, they should still report the sale on Schedule D showing their cost basis, proceeds from the sale, and a gain of $0.

booray · Oct 25, 2012, 06:28 AM

Thanks for the reply. He did, indeed, "decline the inheritance" from his father in law, and the land was never deeded to him. It was deeded directly to the grandchildren.
To complicate matters, two of the adult children bought out the third one a few years ago, and that was also essentially a loss, since the entire farmland value now is barely above what they paid the sibling for his 1/3 of it. Does any of this change your answer?

ebaines · Oct 25, 2012, 06:37 AM

In order to decline one's inheritance he must decline the entire inheritance - so if he kept any other items that were bequeathed to him it's not truly a declined inheritance. But in any event the only impact is that by declining the inheritance the man has no obligation to file a gift tax return. The cost basis for the grand children is still the FMV at time of death of the father-in-law. This cost basis is split 3 ways by the 3 grandchildren.

When the 2 grandchildren bought out the third each for their cost basis is increased by the amount they paid, divided in half. The 3rd grandchild should have reported the sale to his siblings on Schedue D. Other than that, no change from my original answer.