Inheriting land can be both a financial opportunity and an emotional burden. Maybe it is the family farm where you grew up hunting. Maybe it is a timber tract your parents or grandparents held for decades. Maybe it is acreage you never expected to own and do not really have a use for. Whatever the situation, one of the first practical questions that comes up is usually the same: If I sell inherited land, is it taxable? According to Clint Flowers of National Land Realty, the answer is that it can be, but the tax is generally based on the gain rather than the full sale price. “It depends,” Flowers said. “So it’s relative to what their basis is when they inherit it versus what they sold it for. So if that sales price exceeds their basis, then yes, they would pay taxes just on the profit, not on the entirety.” That distinction is enormously important because many heirs assume that since they personally did not pay anything for the property, their tax basis must be zero. In many inherited-land situations, that is not the case at all, in fact, it’s the opposite.
The Key Question Is Your Basis
Basis is essentially the number used to determine how much taxable gain you have when property is sold. If you inherit land after someone dies, the basis can look very different from the basis you would have if that person gave you the land while they were still alive. Flowers explained the difference with a simple example. “If somebody gifts it to you, you got their basis,” Flowers said. “So if you gifted it to the kids and you had $1,000 an acre in basis in it, and they sold it for $3,000 an acre later, they’re going to pay taxes on $2,000 an acre.”
The situation changes when the land passes to the heirs at death. In Flowers’ example, if the property is worth $2,000 per acre at the time of death, the heirs receive a stepped-up basis to that value. If they immediately sell it for $2,000 per acre, there may be no taxable gain in that simplified example because there is no difference between the new basis and the sale price. If they sell it later for $3,000 per acre, the gain would generally be the $1,000 difference. If they hold it for another decade and eventually sell it for $4,000 per acre, their basis does not disappear simply because they inherited the property years earlier. “They’re going to pay taxes on that $2,000 an acre capital gain, that profit, not the whole $4,000,” Flowers said. “I see a lot of people make that mistake. They think because I don’t have anything personally in it, I didn’t write a check, I didn’t have a mortgage, that my capital gain is $4,000 an acre in that example. It’s not.”
That misunderstanding can involve a tremendous amount of money on a large property. Flowers pointed out that if the tract is worth millions of dollars, accurately establishing the stepped-up basis can mean hundreds of thousands of dollars in potential tax savings. An heir who assumes the entire sales price is taxable could dramatically overstate the gain and make a poor decision based on a tax bill that may never actually exist.
You Can Still Establish Basis Years Later
Ideally, the value of inherited property is properly documented around the time of the previous owner’s death, but that does not always happen. Families are dealing with funerals, probate, estate paperwork, and dozens of other problems, and getting a detailed land appraisal is not always at the top of the list. Flowers has worked with families that inherited property years earlier and later discovered that they never properly established the basis.
He described one case involving a family selling property in Escambia County for a woman who had inherited it years before. There had never been an appraisal specifically establishing the property’s basis. The family eventually found an appraiser who could work backward to estimate the value as of the relevant death date, but Flowers believed the original comparable sales being used were too low for that particular tract. Because he had been active in the land business during that period, he still had older sales information that was more representative of the market. The appraiser revisited the valuation and ultimately increased the basis by roughly $1,000 per acre. “Otherwise they would have had to pay taxes on that money if they’d have just taken it without any review or consideration whatsoever,” Flowers said…