The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Estimating Inherited Land Values
Feb 09, 2014
We received the following question from a reader:
"Hello, I am trying to determine how to establish a base value (for capital gains purposes) on some farmland I inherited from my parents.My mother (last surviving parent) died in 2005. We had the land appraised in 2009 but did not actually sell until 2013. I am not sure how to figure out the 2005 value (at the time of her death). Any suggestions would be appreciated."
This situation arises frequently where property is inherited and no estate tax return was either filed or required to be filed. Generally, an appraisal should be done for any real estate that has value at the time of death, but because of the cost, many times it is not done. In the case of this reader, there is a method that can be used in many states to arrive at a value that should be relatively close to the fair market value of the land at the time of death.
Many states (such as Iowa) publish an annual report listing the value of farmland by county and by the quality of the soil. Usually, an index will be published for these values each year. For example, in the case of the reader, the published index for the value of comparable farmland in 2005 (the date of death for the mom) could be 100. When the land was appraised in 2009, the index may have risen to 135. If the appraised value of the land was $7,000 in 2009, you would divide this value by 1.35 to arrive at the 2005 fair market value of $5,185 or so per acre.
Now, if the reader is audited by the IRS, there may be a battle regarding how they arrived at the fair market value used in valuing the land since no appraisal was done in 2005. However, based on the methodology used, most agents will usually agree with the final valuation since it is reasonably determined and based on published indexes.
One final thought on the reader's question is that my assumption is that the mother owned 100% of the land when she passed away. If, however, the father had transferred farmland at his death to the reader, then that portion would need to be valued based upon the year of the father's death, not 2005.