This is a question that many of us may one day ask.
Time waits for no one, so they say. And one day, our parents or grandparents will pass, leaving their property to their heirs.
You might be here right now because you’re one of those heirs. Maybe your mother passed. Maybe it was your grandfather.
Regardless of who it came from, you have a piece of land that you inherited and now you’re wondering what to do with it and how to handle it.
Are you looking to hold onto it and offer it for lease, or do you want to sell it? If so, how?
In this piece, we’ll discuss what it means to have inherited property. Next, we’ll discuss the different options you have for your inherited land. Finally, we’ll teach you a thing or two about how to save money, specifically on tax dues, when you decide to sell the inherited property.
What is Inherited Property?
Inherited property is any property that was passed on to another person following a benefactor’s death.
Under normal circumstances, that person is an heir. Typically, the benefactor who had original land ownership of the inherited land was a family member or someone who put that person in his or her will.
Every country in the world treats inheriting land differently. Most countries also have a dedicated section or field of law about succession and inheritance.
In the United States, every state will treat land inheritance differently, making it an even more difficult subject to tackle here.
Thankfully, we’re not here to discuss inheritance laws or taxes on inheritance.
What To Know When Inheriting Land
One thing you have to understand is that an inheritance land differs from actual land ownership.
What this means is that just because you inherit land does not mean it is already yours. Inheriting property is one thing, but actually merging the title of that inherited property to your name is another. You must still follow a legal process after the probate process.
Transferring ownership of the inherited property to an heir can also become more complicated if there are other family members who are also heirs. A common example of this is when you are inheriting land with siblings, which we will discuss as we move forward.
For now, take note that there are two legal rights involved in this process: your right to inherit land and your right to gain and own that inherited land.
So, what could be the cause that would prevent you from owning land that you just inherited? Again, it’s different in every state, but outside of consulting a real estate agent or a legal counsel, it would be safe to assume that the one thing that could hold you back are taxes.
What About Taxes On Inherited Land?
Depending on your state, you would be required to pay certain taxes before you gain ownership of your inherited property.
Normally, these taxes would be:
- Inheritance tax
- Estate tax
- Property tax
For real estate industry experts, the first two are sometimes called “death taxes”.
Let’s go over the tax implications of these types of taxes now.
Property Taxes When Inheriting Land
Property taxes are a tax on the property by the government.
This is not a tax burden that is exclusive to an inherited property. It is a tax that applies to every land or property, regardless of whether it is an inherited land, a farmland, or an investment property.
What makes this type of tax relevant to your inherited property is that if the inherited land has any unpaid property taxes at the time of the benefactor’s death, then settling those taxes is crucial before it can transfer ownership to you.
Normally, it is the estate that will answer for those unpaid property taxes, but there can be a situation where the estate left behind by the benefactor is not enough to settle those taxes.
In these cases, they can constrain you to sell the inherited land in order to pay property taxes.
In an ideal world, the benefactor would have his or her taxes paid regularly. But this is not always the case.
Inheritance Taxes On Land
Inheritance taxes are those that are paid by the receiver or beneficiary of the inherited land or any type of inheritance.
There are currently six states in the US that impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
The rate of this tax to be paid by the person inheriting the property depends on several factors, such as the relationship with the benefactor, the size of the inheritance, and the tax rate of the state concerned.
Estate Taxes On Land
Estate taxes are those that are levied on an estate. Unlike the tax on an inheritance, it is the estate that pays for the estate tax and not the beneficiary.
In the US, not all estates are required to pay estate taxes. For this, the law observes a threshold, and anything beyond that threshold becomes subject to estate taxes.
In the computation of an estate tax, it is the fair market value of the assets at the time of death of the benefactor that is considered and not the value of the same assets at the time it was purchased or gained.
Other Taxes and Fees When Inheriting Land
The three taxes mentioned are the main taxes that you should consider when dealing with inherited land. However, there are still other taxes and fees that you should be aware of when handling this type of land.
- Capital gains taxes
- Income taxes
- HOA fees
Capital Gains Tax
A capital gains tax, or “CGT, ” is a tax on an investment property that is sold for some realized gains.
Here is a simple example. Suppose you are the sole owner of family land that had a value of $100,000 when you inherited it. Some years later, you end up selling the land for $250,000.
This extra $150,000 is what the law refers to as a realized gain. It is “realized” because you actually sold the property at a gain. And this gain must now be subject to a tax.
This is a simple example. Depending on your state and your social status, among other factors, your CGT will ultimately vary.
If you want to know more about this type of tax, consider consulting an experienced tax attorney so that you can have up-to-date legal knowledge about the subject.
You can also read on and see what we have for you about avoiding this tax altogether.
Income taxes are those that are imposed on any business or property that generates an income.
You probably already know this, as you are likely already paying it with your salary.
As for inheriting property, this can only be relevant if the property generates income and, as a result, has income tax due or unpaid at the time of death of the benefactor.
Inherited farmland, for example, will most likely have income tax that is due, especially if it is under a cash rent agreement or if it is generating an income by selling crops.
This, together with all the other tax types, is what you should consider when you inherit land.
While not exactly a type of tax, in the traditional sense, this is still an important factor that you should consider when inheriting land.
An HOA fee is a fee that is paid to the association that the property is a part of. This fee mostly applies to homes, but a beneficiary could inherit an empty lot in a residential neighborhood that is part of an HOA.
In those instances, any unpaid fees or dues owed to that HOA must be settled before inheriting the lot.
What To Do With My Inherited Land
The main options for inherited property are selling the land, building on the land, or just holding onto the land. Here are some important considerations to help you decide what to do with your land inheritance.
A good starting point is to ask yourself these questions:
- Do you have family members who have an emotional attachment to the inherited land? If so, is there a family home that you may want to build?
- Besides your family, does the land also have multiple people with an emotional connection to it? Does the emotional connection create enough reason to hold onto the property?
- Is the land new to the family? Or has it been with the family for generations?
- Could holding onto the land benefit the next generation of your family? Or could you do more with the money from a sale?
- Is the inherited land farmland or land zoned for development? If so, you could investigate selling land to a developer.
- Have you considered offering the farmland or inherited property for lease? How about a crop share lease with a new owner if it’s farmland?
Holding onto the inherited property will allow the asset to gain value over time. You can pass the land onto the next generation and keep it in the family. However, if no one has plans to do anything with the land, the money spent just to own the lot may no longer be worth it.
If you are inheriting a vacant lot, building a home or turning it into a getaway with an RV or Airstream could appeal to you. But if you don’t have the time or money to put into such a project, selling the land you inherited might make the most sense…
Selling Inherited Land
If you decide to sell your inherited property, you have to choose whether to work with a real estate agent, sell For Sale By Owner, or work with a cash land buyer.
Selling by owner will require the most amount of work, as it’s up to the seller to take care of marketing, negotiating with buyers, showing the land (if requested), and handling the closing process with a title company or real estate attorney.
A real estate agent will cost the most but should save you time because the agent should have experience with land sales. There is a hefty commission to pay land agents (8% to 10%)– but, if you have a busy schedule or live out of state and want to get top dollar for your land, it may be your best option.
A cash land buyer is by far the fastest option when inheriting land you want to sell. At Selling Land Fast, we can close on your land in as short as 21 days. We invest in land nationwide and make free cash offers with no obligations. If you’re interested to know what we could pay for your land, give us a call! (346) 207-1246
How To Avoid Paying Capital Gains Tax on Inherited Land
The better question is, can you avoid paying CGT for selling inherited property?
The thing about tax laws is that avoiding it is illegal, but working alongside a licensed tax attorney could save you money.
In the US, there are ways for you to avoid paying CGT when you sell your inherited land.
Our generic advice would be for you to consult with a real estate agent, attorney, or financial advisor in your state. Of course, it would be beneficial for you to look up online resources to know your options beforehand.
But the easiest way to avoid paying this tax is to sell the inherited land immediately at the moment of death.
If you recall, the CGT is a tax on the gain that is realized. Now, when beneficiaries inherit land, they can do what we call a stepped-up basis of sale where the value of the inherited property is based on the fair market value at the time of death and not the value of the property when it was bought.
So, let’s assume your father bought the property for $100,000. When he passed, the fair market value of the property was $400,000. In theory, if you immediately sell the property at $400,000 after his death, there would be no gain that would come within the application of the CGT.
This, of course, is a very rough and simple example. When you deal with your inherited land, it would always be better to consult an experienced tax attorney about this.
Closing Thoughts: What To Do With Inherited Land
Inheriting land can be both a blessing and a curse. A blessing because you have an asset that you simply inherited, but a curse if the land was left to you under difficult circumstances.
If you are in the middle of inheriting land, you may be grieving, in shock, and frozen all at the same time. Then, the law comes to knock you back into reality to tell you that there are things that must be done, else you will lose this inherited property.
Inheriting property can be a painful process, but it is still a process that must be done. A good way of looking at it is to honor that process so that your loved one may rest knowing that their inheritance has passed on successfully.
We hope you have a better idea of what to do with your inherited land.
If you have more questions about selling inherited property or how to find cash buyers for your land, don’t hesitate to reach out! We would be happy to answer any questions if you want to give us a call. (346) 207-1246