Finding Tax Basis for Farmland and Other Real Estate

For many farm families, land has been owned for decades, sometimes generations. That long history can create a common problem when it comes time to sell or transfer the property and no one is quite sure what the tax basis is.

Tax basis matters. It is used to calculate taxable gain when real estate is sold. The basic formula is straightforward, as the sale price minus the tax basis equals the gain. Without a reliable basis, it is impossible to estimate tax liability or plan for a sale.

Three situations come up most often. The first is inherited real estate where the date-of-death value was never documented or has been lost. The second is real estate that was purchased many years ago, where the original purchase price and improvements are unclear. The third is real estate that was received as a gift. Each may require a different approach.

Inherited Real Estate: Reconstructing Date-of-Death Value

Inherited property receives a “stepped-up” basis. In most cases, the basis is the fair market value of the property on the date of the prior owner’s death. Ideally, the estate would have obtained an appraisal at the time of death. If so, that appraisal establishes the basis. The first step, then, is to check with the attorney who handled the estate or locate estate records to see if an appraisal exists.  Also, any estate tax returns that were filed may include the value of the real estate.

If the estate attorney is not available, probate court records can be checked.  If the land was inherited through a will or intestacy (no will), the estate file should include the value of the land.  The probate can provide the estate file upon request.

If no appraisal was done and/or the land did not go through probate, the value can still be established. A real estate appraiser can perform a retrospective appraisal, determining what the property was worth as of the date of death, even if that was many years ago. Appraisers rely on comparable sales and market data from that time period to support their conclusions.

This is a common and accepted practice. While it would have been easier to document the value at the time of death, a well-supported retrospective appraisal is generally sufficient for tax purposes.

Purchased Real Estate

For property that was purchased, the starting point for basis is the original purchase price. But for land acquired decades ago, that number is often forgotten or business records have been lost.  The first step is to search for any existing documentation. Closing statements, deeds, loan records, or tax documents may provide clues about the purchase price.

If you do not have business records to establish the purchase price, the county auditor can usually help.  When real estate is sold, a conveyance fee is paid to the county auditor. (Note: this is specific to Ohio county auditors.)  The conveyance fee is the sale price multiplied by the conveyance fee factor, usually 0.2% - 0.4% of the purchase price.  The conveyance fee is usually recorded on the face of the deed. So, once the conveyance fee is known, the county auditor can provide the conveyance fee rate at the time of the sale.  With the conveyance fee and the rate, the sale price can be calculated.

For example, a farm was sold 30 years ago.  The deed recorded at the Recorder’s office shows that the conveyance fee was $500.  The county auditor’s records show the conveyance fee at the time was 0.2% of the sale price.  With this information, the sale price is established as having been $250,000.

Gifted Real Estate

Real estate received as a gift is treated differently than inherited property. Instead of receiving a stepped-up basis, the recipient generally receives the same basis the donor had in the property.

For example, if a parent purchased farmland for $100,000 and later gifted it to a child when it was worth $500,000, the child’s basis is still $100,000, not $500,000. If the child later sells the property, the gain will be calculated using the parent’s original basis.

The challenge is that the recipient may not know what the donor originally paid for the property. In these situations, the recipient must determine the last time the property was sold or inherited.  Once this is established, then the value can be determined using the methods described above.

Documentation Matters

In all three scenarios, documentation is key. The more support you have for the value or cost basis, the stronger your position if the IRS ever questions it. Formal appraisals, written records, and credible supporting data all carry weight.

If documentation is thin, it becomes even more important to be reasonable and consistent in how values are determined. A well-documented estimate is far better than no estimate at all.

Final Thoughts

Uncertainty about tax basis is common with long-held farmland, inherited property, and gifted land, but it can usually be resolved with some effort. Whether through locating old records or obtaining a retrospective appraisal, establishing basis is an important step before selling real estate.  Taking the time to determine a defensible tax basis can prevent surprises at tax time and, in many cases, significantly reduce the amount of tax owed.