Farm land value over time

[Native Hunter]

A relative of mine just sold a farm that he inherited in 1981. He will have to pay capital gains tax this year on the difference between what he sold the land for and what it was worth at the time he inherited it. What would be the best way to go about this and come up with the value of the land in 1981? Obviously, he would want this number to be as high as possible but something that he could defend if questioned by the IRS.

 

[Hoytvectrix]

A relative of mine just sold a farm that he inherited in 1981. He will have to pay capital gains tax this year on the difference between what he sold the land for and what it was worth at the time he inherited it. What would be the best way to go about this and come up with the value of the land in 1981? Obviously, he would want this number to be as high as possible but something that he could defend if questioned by the IRS.

Which state? Some state universities track the average price per acre for certain land classes.

 

[FarmerDan]

Random thoughts

1. If there was state and/or federal inheritance tax paid the 1981 estimated value will be a matter of record at the agency receiving the tax payment.
2. Go to the courthouse of the county where the farm is located and dig thru the records for comparable 1981 sales. A couple years one way or the other would be valid - it seems to me. A lot of this data is online now. A call to the county might yield info on what to look for. See the second illustration below.
3. Deflate the sales price back to 1981. It would get you in the ballpark.
4. Hire an appraiser to do the digging. They can go backwards as well doing current valuations

Here's the deflated 1981 value of a 2023 dollar.




If you can find a comparable property the county might maintain its sales history. It's not the final answer but would give a good idea of value of a similar property.

 

[Native Hunter]

Which state? Some state universities track the average price per acre for certain land classes.

KY. Thanks, I did end up finding a graph at a university.

 

[Native Hunter]

Random thoughts

1. If there was state and/or federal inheritance tax paid the 1981 estimated value will be a matter of record at the agency receiving the tax payment.
2. Go to the courthouse of the county where the farm is located and dig thru the records for comparable 1981 sales. A couple years one way or the other would be valid - it seems to me. A lot of this data is online now. A call to the county might yield info on what to look for. See the second illustration below.
3. Deflate the sales price back to 1981. It would get you in the ballpark.
4. Hire an appraiser to do the digging. They can go backwards as well doing current valuations

Here's the deflated 1981 value of a 2023 dollar.

View attachment 56480


If you can find a comparable property the county might maintain its sales history. It's not the final answer but would give a good idea of value of a similar property.
View attachment 56481

I had thought about the inflation calculator. Thanks.

 

[Turkey Creek]

I would guess that unfortunately depending on if the IRS allows for inflation, the county assessor has record of its value in 1981. I know they do in Nebraksa.

 

[Brian662]

Local realtors have knowledge of average cost per acre usually by county. Not sure of their records back that far but it might be worth a phone call. They may have a database.

 

[Foggy47]

Local realtors have knowledge of average cost per acre usually by county. Not sure of their records back that far but it might be worth a phone call. They may have a database.

I'd bet the county tax assessors office would have some records of such things. OTOH.....you may not want them involved in your taxes.

 

[b116757]

He could also purchase some more farm ground elsewhere and not have as large of tax liability depending on his end goals.

 

[Turkish]

A relative of mine just sold a farm that he inherited in 1981. He will have to pay capital gains tax this year on the difference between what he sold the land for and what it was worth at the time he inherited it. What would be the best way to go about this and come up with the value of the land in 1981? Obviously, he would want this number to be as high as possible but something that he could defend if questioned by the IRS.

Another thought… weren’t the 80s a time with incredibly poor farm land prices?

 

[Native Hunter]

He could also purchase some more farm ground elsewhere and not have as large of tax liability depending on his end goals.

Wouldn’t he still have to pay the capital gains tax? I was thinking he would but maybe not?

 

[Native Hunter]

Another thought… weren’t the 80s a time with incredibly poor farm land prices?

Per the graph I saw that started happening a little after 1981.

 

[Native Hunter]

Thanks everyone for the replies. I’m sure the county would have something but the PVA values are extremely low. I’ve reached out to a realtor to see if he can advise. If the IRS would accept the inflation calculator, that looks like the best option so far.

 

[Turkish]

Wouldn’t he still have to pay the capital gains tax? I was thinking he would but maybe not?

A 1031 exchange would allow him to replace it with other investment real estate and not pay capital gains taxes. I’m NOT a CPA.

 

[Brian662]

A 1031 exchange would allow him to replace it with other investment real estate and not pay capital gains taxes. I’m NOT a CPA.

I have not done it nor am I a CPA. I believe you're correct. Really the only way to avoid the capital gains (that am I aware of) is for the owner to die and the inheriter gets a "step up" in basis at the time of the inheritance. Then the inheriter may sell without tax penalty.

*full disclosure, I'm only regurgitating what I've read, zero real life experience with this*

 

[Foggy47]

A 1031 exchange would allow him to replace it with other investment real estate and not pay capital gains taxes. I’m NOT a CPA.

^^ This

 

[Native Hunter]

Thanks. I will advise him to discuss with a CPA.

 

[Tree Spud]

Thanks everyone for the replies. I’m sure the county would have something but the PVA values are extremely low. I’ve reached out to a realtor to see if he can advise. If the IRS would accept the inflation calculator, that looks like the best option so far.

I could be wrong, but I doubt they will. For current prices they can look at recent comps on similar ground sold. For historical value, The tax accessor will have historical data they can look at.

Good that he is selling now as there is a strong probability that capital gains are going up. Biden wants to raise them from 20% to 39.6% in 2024. Definitely have him talk to his accountant or tax guy. They can advise him on what can be used to demonstrate change in value to IRS.

Capital Gains Going Up

 

[Wind Gypsy]

Edit: just re-read the original post that the land already sold so the below wont be applicable and with the current rates available with CD's, money market funds, etc the concept doesn't pencil out in as many situations for sellers like it used to.

One thing I heard mentioned on the Land Podcast used as a tool to avoid some capital gains tax particularly for folks on a limited fixed income is Land Contracts. Basically you sign a contract with purchaser for them to pay seller directly in payments over a span of years. Depending on sellers income and tax bracket, capital gains can be reduced or eliminated entirely. From what I gather, in many cases if the buyer fails to pay the land becomes property of the seller in whole without regards to payments previously made. Good deal for sellers who don't need all the money at once for another purchase and good deal for buyers who want to avoid a loan with interest.

If Seller's annual income is less than 44,625 single or $89,250 married, any of those annual payments prior to their income hitting the max $ below would be tax free.

 

[T-Max]

I'm a county appraiser in Kansas and I could probably get records back that far. I think it is worth a call to the local assessor/appraiser at least.