Farm Estate and Succession Planning
This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.
Partial Gift and Partial Sale of Land to Family
Nov 11, 2011
Review of Partial Gift and Partial Sale of Land
I often work with farmers with a land sale transaction that involves the concept of a partial sale / partial gift of land. This involves a situation where a land owner sells to a family member land for an amount less than fair market value. It is very important to properly document and account for the fact that the transaction is a partial gift and partial sale, and ultimately less than fair market value. The results of this are two part:
1) Capital Gains Tax:
v Any portion of the sale over seller’s basis is subject to capital gain tax.
v Any portion of the sale under the seller’s basis would transfer free of capital gain tax.
2) Gift Tax Ramifications:
v Depending on the amount of the gift, a gift tax return will likely need to be done, and the gift will be subject to the giver's unified credit.
For example, John and Jill Doe own 160 acres of land, which a certified appraiser valued at $620,000 (best way to determine fair market value). They bought the land in 1980 for $80,000 (basis.) They want to sell the 160 acres to their son and daughter in law for $300,000.
The result of this transaction is as follows: John and Jill sold the land in 2011 for $300,000, which is $220,000 over their original basis of $80,000. The $220,00 is considered a capital gain will be subject to capital gains tax.
The $300,000 sale price was $320,000 less than the $620,000 fair market value. The $320,000 amount less than fair market value is the portion of the sale that will be considered a “gift”, and must be calculated as a gift. John and Jill Doe must have the proper gifting documentation done.
One final note: Son and daughter in law’s basis in the land will be $300,000 (what they purchased it for) NOT the $620,000 current fair market value.
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Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.