Dear Mr. Premack: Years ago my husband inherited ranch land from his parents, when it had very little monetary value. My husband died this year and left the land to me. I have no desire to keep the land. My two daughters also have no interest in the land. I listed it for sale and are about to receive $1.5 million in the sale. I have three questions. Will I lose a portion of the money to taxes? If I give some of the money to my daughters, will they have to pay taxes? How do I keep my sons-in-laws from controlling money that I give to my daughters? Thank you. – B.R.
Let’s start with the history of the ranch. Your husband inherited it, which means it was his separate property. Whatever value the land had on the date he inherited it (plus improvements he may have made to the land) was his “tax basis”. If he was still living and had sold the land like you have, he would owe capital gain taxes on the difference between his basis and the sales price. If his basis was $200,000 and it sold for $1.5 million, his gain was $1.3 million. That is subject to long-term capital gain rates, so he would have owed about $195,000 in taxes.
But he did not sell the land. He willed the land to you upon his death. (I presume you probated his will, became executrix, and in accordance with his instructions have filed a deed that puts full title to the land in your name. If you have not done so, the title company will raise a large objection which will delay the sale until you cure the title by probating his will.) When you inherited the land, you received a “free step-up in basis”.
That means that whatever the land was worth on the date of his death became its tax basis. Since he died very recently and you listed the land for sale, the “fair market value” of the ranch matches its basis. That is, your basis is $1.5 million and the sale price is $1.5 million, so you have no gain and owe no capital gain tax. You just saved $195,000, and that is the answer to your first question.