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Arizona Real Estate Law
by Christopher A. Combs
The following is for informational purposes
only and is not intended as definitive legal or tax advice. You
should not act upon this information without seeking independent
legal counsel. If you desire legal, tax or other professional advice,
please contact your attorney, tax advisor or other professional
consultant.
Inheritance of Land Recommended Over Inheritance
of Money
Question: My mother owns a large ranch in western Arizona.
Under her will, my sister and I are to split everything equally.
My mother’s ranch has appreciated significantly in value in the
past few years. My mother is in failing health and wants to sell
the ranch. She has been advised for tax reasons, however, not to
sell the ranch. Is this advice right? Tax wise, are my sister and
I better off inheriting money or land?
Answer: If your mother dies, and you and your sister inherit
the ranch, there will be a “step up” in basis in the value of the
ranch from the time of purchase to the time of your mother’s death.
Therefore, any sale of the ranch by you and your sister shortly
after your mother’s death will have little or no capital gain tax
owed. If the ranch is sold prior to your mother’s death, there will
be capital gain tax owed by your mother on basically the difference
between the purchase price of the ranch and the sales price of the
ranch. Therefore, after your mother’s death there will be a significant
diminution in the inheritance by you and your sister because of
the payment of these capital gain taxes. In general, elderly people
should not sell property or give property during lifetime to their
heirs as part of estate planning because of the adverse tax consequences.
In addition to a will, a beneficiary deed or revocable living trust
can transfer the property to the heirs after death without the adverse
tax consequences. Note: An alternative for your mother would
be a 1031 tax-deferred exchange to trade the ranch for vacant land
which may be less burdensome to your mother than the ranch. If your
mother did such a 1031 tax-deferred exchange, the vacant land will
also have the tax advantage of a “step up” in basis to the value
of the vacant land at the time of your mother’s death.
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