Secondary property

[Hyper]

We inherited small amount of undeveloped acreage when MIL passed in our home state.
We've been paying reasonable property taxes for 20ish years.
Well the supposed value AND taxes tripled. Extremely depressed area! We have no desire to ever move back after 30 yrs and we only go back to see ailing family.
I've not been able to find "property" only, online for long term capital gains taxes. Only mentions secondary homes, rentals, etc.
If we sell the property, can we use the 20ish years of property taxes against gains? I think it would be considered gains as we inherited the land??
We would be very close to the 0% tax rate for income, $42k
Pardon me, if I post bad info. TIA

 

[MarieIG]

Hi Hyper,

For clarification, did you inherit the property from you MIL 20 years ago, and have been paying property taxes yearly since then?

I inherited a home from my parents. I was aware of getting a "step-up" in basis, but not aware of being able to deduct the property taxes from the home value. (It was a second residence but not used as a business.) My state allowed for a deduction of property tax on my yearly income tax, in the event my property taxes exceeded the standard deduction.

Hopefully one of our tax experts will chime in.

 

[Sunset]

Here is my opinion:

When you inherited the land, it had some value, that is the basis

When you sell, you will have long term capital gain: Selling price - expenses to sell - basis = LTCG
Example: $100K selling price - $10K expense lawyer realtor - $30K basis = $60K LTCG

The property tax paid over the years is not counted (I think). As it can't be added to the basis as is not an improvement to the land.
Had you fenced in the land at a cost of say $5K, then you would add the $5k addition to the basis value.

 

[Hyper]

Hi Hyper,

For clarification, did you inherit the property from you MIL 20 years ago, and have been paying property taxes yearly since then?


Yes, correct.

 

[Hyper]

Here is my opinion:

When you inherited the land, it had some value, that is the basis

When you sell, you will have long term capital gain: Selling price - expenses to sell - basis = LTCG
Example: $100K selling price - $10K expense lawyer realtor - $30K basis = $60K LTCG

The property tax paid over the years is not counted (I think). As it can't be added to the basis as is not an improvement to the land.
Had you fenced in the land at a cost of say $5K, then you would add the $5k addition to the basis value.

So would we use latest assessed value for "basis" against gains, if any?

 

[MarieIG]

So would we use latest assessed value for "basis" against gains, if any?

When we sold our home, the "gains" were calculated as outlined by Sunset. The sales price to an unrelated third party controlled (not the assessed value).

 

[cathy63]

You cannot deduct property tax paid over the past 20 years when you sell the land. Property tax is useful on a Federal tax return only in the year you pay it.
1) It's a deduction on Schedule A if you have enough total deductions to itemize. Property tax falls in the State and Local Taxes (SALT) category and you are limited to $10K of deductions for SALT.
2) If the land is rented out, then it's an expense on Schedule E.

If neither of the above is possible, then the property tax is just a cost of having owned the land. You don't get anything for it, other than county services such as roads, sewers, police, etc.

So would we use latest assessed value for "basis" against gains, if any?

No, the recent assessed value is not relevant in calculating your gains. The basis was established on the day you inherited the property 20 years ago. Whatever its value was then is your starting basis. If you built anything on the property during the time you owned it; or if you ran sewer lines; or paved a driveway; or put up a fence; or anything similar, then you can add the cost of those items to your starting basis to get your adjusted basis.

The Long Term Capital Gain from the sale will be: Sales Price minus Selling Expenses minus Adjusted Basis

If you really think the land will sell for 3 times its value when you inherited it and you haven't done anything to the property since then, you will be paying cap gains tax on a bit less than 2/3 of the sales price after you pay your real estate agent or attorney.

If you are married filing jointly and your income is $42K, then some of your gain will be taxed at 0% (i.e. not taxed) and some at 15%. I'm guessing none will be at 20%, since you say it's a depressed area, but without knowing how much you expect the property to sell for it's impossible to say.

 

[skyking1]

Thank you @Sunset and @cathy63 for those explanations.
One thing I would add to the conversation is the section 1031 exchange.
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

This is a process where you can get some similar property with the proceeds from the sale of the original property, as long as the transactions are done according to the rules. It has to be an arms-length transaction, where the proceeds from the sale are held in escrow by a 3rd party. You cannot receive the proceeds in any way.
This is a tax break for you. If your exchange meets the rules it allows you to defer the capital gains until the final sale of property.
For example we are using it to exchange some beach property with about 50K in capital gains, for a similar vacation property closer to our new home.
I only bring it up so you know it is a possibility. You may have no interest in getting other property, but if for example you did like the idea of a camping lot or other similar situation, this defers that tax.