Tax Research Memorandum
To:
Jean Davis
Date: December 1, 2019
By:
Re:
Inherited land as Taxable Income if sold
FACTS
The relevant facts of the situation are as follow:
1. Ms. Davis inherited vacant land from deceased father in 2006.
2. She wants to sell the land at $100,000
3. When land was inherited value of property was $70,000
4. She has held the property since 2006 to 2019 (13 years).
ASSUMPTIONS
I made the following assumptions:
1. Land was inherited on Oct 15, 2006.
2. Ms. Davis was offered $90,000 for the land as a fair market value.
3. Property has not been sold, due to wanting to sell for $100,000.
QUESTIONS
Does selling the land that was inherited for “x” amount affect Ms. Davis’s
taxable income? If so, how much taxable income does she have if sold for
$100,000 in 2019?
CONCLUSION
Ms. Davis would be obliged to taxable income on the amount over $70,000.
The amount over $70,000 would be considered the capital gain in which
would be taxed.
ANAYLSIS
A. IRC Code Sec. 1014 (a) (1) provides that:
Except as otherwise provided in this section, the basis
of property in the hands of a person acquiring the property from a
decedent or to whom the property passed from a decedent shall, if
not sold, exchanged, or otherwise disposed of before the
decedent’s death by such person, be—
(1) The fair market value of the property at the date of the
decedent’s death,
For Jean Davis the basis would be $70,000, which was the fair market value
at the time of the decedent’s death.
B. Now it turns to whether it is a capital assist. If used in trade and business
it would be subjected to deprecation, but due this being land you are not
able to deprecate. For Ms. Davis this would be a personal capital asset.
As IRC section 1221 states For purposes of this subtitle, the term “capital asset” means property held
by the taxpayer (whether or not connected with his trade or business)
Given Ms. Davis sells her personal “capital asset” for more than the
$70,000, it would leave her with a capital gain, which would be
subjected to taxes.
C. The next issue is if this would be long term or short-term capital gain or
loss.
IRC section 1222 (3)
The term “long-term capital gain” means gain from the sale or exchange
of a capital asset held for more than 1 year, if and to the extent such gain is
taken into account in computing gross income.
Knowing Ms. Davis has held the property for 13 years this would be
considered a long-term capital asset. Depending on her filling and income
brackets she could be taxed from 0 to 20% on the gain.
D. The last step is understanding the IRC section 1231:
GENERAL RULE
(1) GAINS EXCEED LOSSES if
(A) The section 1231 gains for any taxable year, exceed
(B) The section 1231 losses for such taxable year, such gains and losses shall
be treated as long-term capital gains or long-term capital losses, as the case
may be
(2) GAINS DO NOT EXCEED LOSSES if
(A) The section 1231 gains for any taxable year, do not exceed
(B) The section 1231 losses for such taxable year, such gains and losses shall
not be treated as gains and losses from sales or exchanges of capital assets.
Final step in the analysis is determining the amount of capital gain or loss
and hold period. Since the basis of the land is $70,000, and is considering
selling for $100,000 there is a gain. Furthermore holding the property for
13 years makes this a long-term capital gain.