My wife inherited a piece of commercial property....

4 Replies

Recently my wifes parents went ahead and split up their inheritance and my wife received her share of the inheritance, they wanted to do it before they died cause they would rather see her benefit while alive...Anyway, Its a piece of commercial property that is paid for completely right downtown. Her and I both are into the rental houses, this is what we want to do. I have not had the commercial property appraised yet, but did receive a cash offer on the land for $50k, the guy owns an insurance building next door to it.

My question is, is there a way to benefit by keeping the property? Ive thought about putting a building on it etc. but now your talking about loans in the 200k-300k. I dont want that much invested. Ive thought about refinancing the land and taking that money and buying more houses however, I believe that commercial land rates go up after a few years, their not fixed rates.

Other than having the land appraised and then saling it, is there anything else I can do to exhaust this property and get the max out of it? Also lets say it appraises for 100k, does that mean I shouldnt take a penny less than what it appraises for? As of now the taxes are $1500 a year and were not making ANY money on it. This will be the second year that we have paid taxes on land that is just sitting there not making us money...Im not cool with that.

Any ideas would be great.

First, have you discussed this situation with your CPA?  Them giving it to you while they're alive, and in one big lump at a time, has tax consequences for both of you.  For you, it means (I think, not a CPA) your basis is their basis.  So, the gains when you sell are higher than if you inherited at death.  At the very least you need to figure out what their basis was when they gave it to you because you will eventually need that number.  For them, that probably exceeds the yearly gift limit.

You should get as much for it as you can.  That may or may not have a relationship with an appraisal.  An appraisal is really just an estimate by one person based on the facts at one point in time.  Land is especially difficult to put a value on, unless you have a really good basis for comparison.  What's going on in your area?  Have similar parcels in the same area sold recently?  Any construction going on?  Is there demand for new buildings of the sort you or someone might build there?  Even if an appraiser comes up with $100K for the value, if the only buyer is the guy next door with $50K cash, that might be worth taking.

If there are any lots for sale, call the listing agent on those and discuss your lot.  If there is any construction in your area, track down the builder or owner and talk with them.

Well my wifes parents went to a lawyer and had the land deeded over to us. So now at the courthouse our name is on the land. Does this sound right?

If you have no money to build you could do a ground lease on the land. Preferably a national tenant. They have their own construction crews build the building on your site and then they rent the land from you.

The ground leases usually run 15 to 20 years. You can sell off the ground lease later on if you no longer want the land. At the end of the primary term the building usually reverts back to you the land owner for free if the tenant does not exercise their lease option.

No legal advice.   

Well my wifes parents went to a lawyer and had the land deeded over to us. So now at the courthouse our name is on the land. Does this sound right?

For the transfer process, yes.  But that doesn't deal with your income tax issues. 

When you sell a property you pay income tax on the gains.  If you buy and then sell a property, that "gain" is the selling price less selling costs less your basis.  Your basis is your purchase price plus purchase costs plus any capital improvements.  When you inherit a property your basis becomes the value of the property on the date of death.  If there property has been held many years and has appreciated significantly the heir's basis can be much higher than the decedent's.  That means if the heirs sell shortly after the death, they will have very little, if any, income tax.

Because they gave the property to you while they are alive, their basis in the property becomes your basis.  That makes the gain when you sell much higher.  You do still need to figure out this number.  It will be much easier to figure it out now, while they're still alive.

Say they paid $10,000 for this chunk of land, including their closing costs.  And say its now worth $50,000.   If you inherited it now, your basis would be $50,000.  If you turn around and sell it for $50,000 and have $5,000 in selling costs you would net $45,000 on the deal.  Because your basis is $50,000, you actually have a loss (the selling costs), so you would have no income tax.  OTOH, since they gave it to you, your basis is theirs, which is $10,000.  Now if you sell it for a net of $45,000, you have a gain of $35,000.   You will have income tax on that amount.  That should be long term capital gains at 15% (plus state taxes).  So you would have a federal tax bill of $5250.

In each tax year, one person can give another a certain amount.  In 2014 it is $14,000.  I think it was $13,000 in 2013.   Your wifes parents can give you and your wife each $28,000 in 2014 with no impact.  So, if the property is worth less than $56,000, there is no impact on your parents.  You have to adjust that number based on the limit in the year when they gave you the property.  If the value is more than that, the excess reduces your parents lifetime gift limit.  Now, that's a big number.  Something over $5 million.  So, as far as I know, if their estate is less than that big number, this isn't a factor.  OTOH, if they do have significant assets, this may come into play and make cause taxes to be generated for the heirs when they do die.

The point is there are significant tax disadvantages to what they have done and they affect you (for sure) and them (possibly.)

With that behind us, what's going on in the area?  Building?  No building?  Stores moving in?  Stores closing?  This all comes down to demand.  This parcel could be worth a large amount or nearly nothing.   It may have value, but if there is no demand, then you can't extract that value.

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