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Sell the farm or pass it on to the heirs?
Old 08-19-2012, 08:44 PM   #1
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Sell the farm or pass it on to the heirs?

My mother owns a small farm together with her brother and sister. They are in their upper 80's. My sister, brother, and I are the only heirs. We've been told that we will inherit the assets of the three elders.

The elders are considering selling the farm. Their reasons is, "we don't need it any more". None of them is wealthy, but they don't need cash either. They're asking the heirs what we (the heirs) think. I feel it would be better to keep the farm because of the costs incurred in selling it.

The primary costs of selling the farm as I see it include: an 8 percent realtor's fee, and a 15 percent capitol gains tax (or would that be income tax?).

I'm thinking it would be better for the heirs to inherit the farm directly. They could then sell it and avoid the capitol gains tax since the cost basis would be the value of the farm at the date it was inherited. The heirs might even sell the farm themselves, avoiding the realtor's fee as well.

I'm not an accountant. My thoughts may be completely bogus. What do you think? Should the elders keep the farm or sell it?

thanks!
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Old 08-19-2012, 08:55 PM   #2
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My mother owns a small farm together with her brother and sister. They are in their upper 80's. My sister, brother, and I are the only heirs. We've been told that we will inherit the assets of the three elders.

The elders are considering selling the farm. Their reasons is, "we don't need it any more". None of them is wealthy, but they don't need cash either. They're asking the heirs what we (the heirs) think. I feel it would be better to keep the farm because of the costs incurred in selling it.

The primary costs of selling the farm as I see it include: an 8 percent realtor's fee, and a 15 percent capitol gains tax (or would that be income tax?).

I'm thinking it would be better for the heirs to inherit the farm directly. They could then sell it and avoid the capitol gains tax since the cost basis would be the value of the farm at the date it was inherited. The heirs might even sell the farm themselves, avoiding the realtor's fee as well.

I'm not an accountant. My thoughts may be completely bogus. What do you think? Should the elders keep the farm or sell it?

thanks!
I don't think you mentioned how large the farm is or what its characteristics are, but generally speaking, I'm of the opinion that unless the money is needed now, don't sell farm land. If you do, please keep the mineral rights.
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Old 08-19-2012, 09:19 PM   #3
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Yes, selling the farm loses the basis step up, OTOH there are likely real estate taxes that must be paid annually.

Another consideration: if the farm is very valuable, it could trigger a large estate tax. If there is no liquidity elsewhere to pay that tax, the farm would have to be sold quickly. Selling anything in a hurry is usually a very bad way to get a good price.
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Old 08-19-2012, 09:26 PM   #4
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km4Hr: I'd say your thoughts are correct.

You might consider trying to find out the current cost basis from your mom's taxes and calculated the taxes selling it now versus waiting.
I bet if you showed them that selling it now meant "x" number of tax dollars versus the tax dollars for selling it after it is inherited would help them make their decision. Unless of course they actually do need the money.
And it depends on how big a farm it is and what the value is but as Gray Hare says, if it is large and worth millions it could trigger an estate tax bill...so it matters how much money you are talking about.
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Old 08-19-2012, 09:29 PM   #5
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It depends. What do they estimate the value of the property? What is their basis (cost and improvements)? Do they live on the farm? Do you expect there to be high demand for the farm - will it sell quickly?

The realtor's fee isn't important to the decision since it will be incurred whether they sell it now or whether you inherit it and sell it later.

If there is no principal residence exclusion available and the tax on the proceeds from the sale would be significant, then it might be better to wait to get the step up in basis.

Until you know roughly what these costs would be you can't make an intelligent decision. Sometimes a bird in the hand is worth two in the bush.
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Old 08-19-2012, 09:32 PM   #6
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I don't think you mentioned how large the farm is or what its characteristics are, but generally speaking, I'm of the opinion that unless the money is needed now, don't sell farm land. If you do, please keep the mineral rights.
The farm is about 200 acres of poor quality land, mostly wooded. It's not near a city or industrial area. There is a small rental house, almost worthless. I'm pretty sure there have been no oil or gas discoveries in the area.

I see no reason for the property to appreciate substantially in the near future. However, it might do as well as cash in a bank savings account which is where they would likely put it.
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Old 08-19-2012, 09:48 PM   #7
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Does the farm have any income generated from sale of firewood or leased acreage to nearby farmers to farm? That could help offset any ongoing costs. Are you or your sibs interested in the farming or country lifestyle to where it would have sentimental value to remain in the family?
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Old 08-20-2012, 12:43 AM   #8
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The farm is about 200 acres of poor quality land, mostly wooded.
What kind of wooded, and how mature? Any chance the standing timber could be worth more than the real estate it's standing on?
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Old 08-22-2012, 07:53 PM   #9
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If the three heirs got together this weekend could you agree on what movie to go to?

If your parents keep the property will it be an easy or impossible task to decide what to do with it? Sell,hold,clear cut or raise organic acorns.
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Old 08-22-2012, 08:25 PM   #10
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Well, we have a farm in our family that was inherited by 3 sisters, two have died and passed their inheritances on to their kids . . . so, some heirs now own as little as 1/6 of this farm.

They all have to add another state to their taxes to pay the property taxes, and split a little rent check that barely covers the added CPA fees . . .

I am in line to inherit 1/9 of this farm, and don't want any part of it - but, getting all the heirs to agree to sell at this point has been futile.

So, my vote would be sell the farm so future generations don't get saddled with a mess.

But, my opinion is obviously jaded on this one.
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Old 08-22-2012, 08:45 PM   #11
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As part of a genealogy project, I just inherited a boxload of legal documents from a messy fight between my grandmother and her siblings over farm inheritances and mineral rights. Some relatives thought it was a gold mine and insisted on keeping it. Others wanted to sell. Some sold timber without getting consent of the group. It split them and resulted in an expensive legal fight that cost them 20 years of kinship. In the nineties, it was finally sold for its actual value, about 12k. The lawyers made much more.

Split inheritances of property can be a mess when greed and dissent set in. just something to add to your equation.

SIS
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Old 08-23-2012, 06:37 AM   #12
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I'm pretty sure there have been no oil or gas discoveries in the area.
It might not be a bad thing. It could turn ugly if you don't have mineral rights, and they found shale gas later and start injecting "soapy" water into ground near/on the farm.

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I see no reason for the property to appreciate substantially in the near future. However, it might do as well as cash in a bank savings account which is where they would likely put it.
I see no reason for the farm to depreciate substantially in the near future either. However, the cash your elder put into their savings account might not farewell at all if more QEs are coming.
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Old 08-23-2012, 08:50 AM   #13
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What is the last 5 or 10 year history of the farm? I can't imagine a 200 acre farm sitting idle long without the tillable fields at least being leased out. What are they paying in property taxes?
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Old 08-23-2012, 11:04 AM   #14
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I would think at the very least the hunting rights could be leased out for the cost of taxes, etc., each year. Personally, I would hang onto it.
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Old 08-23-2012, 11:35 AM   #15
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It might not be a bad thing. It could turn ugly if you don't have mineral rights, and they found shale gas later and start injecting "soapy" water into ground near/on the farm.


If really concerned one could try retaining the mineral rights in the sale.
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Old 08-23-2012, 03:06 PM   #16
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I'm very impressed with DW's grandfather's wisdom. When it came time to sell his 1881 homestead. He set a price much lower than the market rate and offered the whole place including mineral rights to any or all of his eight children (only). DW's father was the only one who offered to pay the grandfather's price for the whole place. Don't know what would have happened if no one had taken the offer. Don't know what would have happened if any or all of the other seven had wanted to take the offer.

In addition, grandfather deeded the family cemetery and access road which is on the place, to his nearby church. Today, the cemetery is still well maintained by a strong and active cemetery association.

Grandfather did this after his wife (DW's grandmother) had died. Grandfather lived into his 90's and retained full mental ability until the end.
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Old 08-23-2012, 03:11 PM   #17
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I'm pretty sure there have been no oil or gas discoveries in the area.
Plenty of people in Penn, Ohio, North Dakota etc probably said the same thing 15 years ago. I would retain minerals (if you even have them) and just sell surface if you are wanting to sell. If the buyer wants minerals, put a valuation on it like there is 1 million bbls of oil below.

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It might not be a bad thing. It could turn ugly if you don't have mineral rights, and they found shale gas later and start injecting "soapy" water into ground near/on the farm.
One mineral owner is unlikely to stop the process. Just like a surface owner can't stop someone from drilling on their land.

A couple other comments, you will likely have depreciation recapture to pay as well (if it was depreciated). If you have an interest in maintaining the land long term, an exchange would be much more beneficial.

My family lost some of its farm land in some divorce proceedings. It was never again farmed, but the weeds took over. It was, decades later, sold to a government agency for quite a handsome sum, more than what the rest of the family farm land would go for. So, I wouldn't ever say it has very little room to appreciate.
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Old 08-23-2012, 10:25 PM   #18
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Plenty of people in Penn, Ohio, North Dakota etc probably said the same thing 15 years ago. I would retain minerals (if you even have them) and just sell surface if you are wanting to sell. If the buyer wants minerals, put a valuation on it like there is 1 million bbls of oil below.



One mineral owner is unlikely to stop the process. Just like a surface owner can't stop someone from drilling on their land.

A couple other comments, you will likely have depreciation recapture to pay as well (if it was depreciated). If you have an interest in maintaining the land long term, an exchange would be much more beneficial.

My family lost some of its farm land in some divorce proceedings. It was never again farmed, but the weeds took over. It was, decades later, sold to a government agency for quite a handsome sum, more than what the rest of the family farm land would go for. So, I wouldn't ever say it has very little room to appreciate.
One can do a wavier of surface rights when one retains the minerals, which would protect the new surface owner from drilling on their land. With horizontal drilling it can be over a mile from the drill site to where the well produces. Of course you price the land higher with the wavier of surface rights, but no buyer in their right mind would buy without it, nor if the land is developed, would the bank make a mortgage on it without the wavier. This is done all the time in Texas.
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Old 08-23-2012, 11:44 PM   #19
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One can do a wavier of surface rights when one retains the minerals, which would protect the new surface owner from drilling on their land. With horizontal drilling it can be over a mile from the drill site to where the well produces. Of course you price the land higher with the wavier of surface rights, but no buyer in their right mind would buy without it, nor if the land is developed, would the bank make a mortgage on it without the wavier. This is done all the time in Texas.
Minerals take precedence over surface. That is all you need to know. You CANNOT stop someone from obtaining the minerals.
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Old 08-24-2012, 05:48 AM   #20
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An ancient Chinese proverb sums up your ordeal:
"One does not know a person until he has shared an inheritance with him".

My time is coming, too.
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