When someone dies and leaves land to someone else, there is a potential that the person who inherits the land might owe taxes. Therefore, it is important to know the value of the land. There are several ways to determine the value of land. However, the cost basis is usually the method used to determine the amount of money that the inherited land is worth.
Land is considered an asset classified as real property, also referred to as real estate. Whenever someone acquires an asset, it has a value. That value is normally based on the amount of money it cost to acquire it, and it is the person's original basis for what the asset is worth. When someone buys land or receives it in trade, determining the basis value is straightforward. It is valued at what they paid for it or the monetary value of whatever they traded for it, subtracting depreciation and adding improvements.
However, when someone inherits land, although that person did not pay money for it or trade something for it, the land also has a value. The original value of the land for the person inheriting it is set by determining the cost basis. The Internal Revenue Service uses the cost basis of land as the value upon which a person might owe tax.
When someone inherits land, the cost basis of the land is set at the fair market value of that piece of real estate, because that is what it would cost to purchase it at that time. The most common method is to use the value of the property at the time the deceased died. However, in some circumstances, the person handling the estate may use the fair market value of the property at a date up to six months after the death. Sometimes an estate is large enough to incur a tax. In those cases, using an alternate valuation date makes sense if the value of the land drops within six months of the decedent’s death.
Knowing the cost basis of inherited land is also important if the person later decides to sell the property. Like any other asset, the sale of land at a future date might result in making or losing money. That would mean either a capital gain or loss for income tax purposes. Therefore, the IRS requires people to use the cost basis value of the inherited land if they later sell it to determine whether they had a gain or a loss.
- IRS.gov: Publication 551 - Main Content
- IRS.gov: 13. Basis of Property
- Turbo Tax: Cost Basis: Tracking Your Tax Basis
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- W.J. McCluskey, Owiti A. K'Akumu, and Washington Olima, "Land Value Taxation -- Chapter One: Theoretical Basis of Land Value Taxation," Page 3. Ashgate Publishing, 2005. Accessed June 17, 2020.
- Lincoln Institute of Land Policy. "Land Value Tax Holds Promise for Cash-Strapped Cities and Towns." Accessed Feb. 5, 2020.
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Jeanne Young began writing professionally in 2000. She was the government reporter for a daily newspaper in central Florida. Young has also covered general assignment and the business, health, science, environment and education beats for newspapers and a wire service, and written about money and politics. She holds a Bachelor of Arts in English from the University of South Florida.