Land! Its The Only Thing That Lasts!

Apr 13th, 2009 – Comment

Steve from Cambridge writes about capital gains on land: Hi Lou, When selling land that has been gifted by a family member (not inherited), how is the basis for tax established? I understand the determination of property vs business vs capital gain income, however my question is, will the all the proceeds be taxed since […]


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Steve from Cambridge writes about capital gains on land:

Hi Lou,

When selling land that has been gifted by a family member (not inherited), how is the basis for tax established?

A Man Without Land Is Nothing

A Man Without Land Is Nothing

I understand the determination of property vs business vs capital gain income, however my question is, will the all the proceeds be taxed since nothing was paid for the land?  Thanks and happy capitalism.

Steve

Hi Steve,

I was an avid movie fan in my youth and I loved the scene in ” Gone With The Wind” where Mr. O’Hara lectured Scarlett on the value of land.  Woody Allen included a scene  in ” Love and Death”  that expounded on how much land has meant to a poor peasant and the entire plot of the ” Apprenticeship of Duddy Kravitz” is about acquiring and developing land.

What all the cinematic references in the world never talk about is the cost of receiving and carrying land which includes the taxes due on the disposition of land. There are two life lessons that are worth committing to memory for all time.

The first is there are very few transactions that do not attract tax and when dealing with tax issues make sure to consult a tax expert to avoid problems down the road.

I asked my expert Art Good, Chartered Accountant, who I call  Art Great because he has solved so many tax problems for me, to comment on your question for this very reason.

Here’s what Art had to say.

Hi Lou:

In answer to your question about the taxation of land that was received by way of a gift from a family member (a non-arms length transaction) the transfer is always deemed to be at fair value.  Therefore, on the initial gift there will be tax if the fair value exceeds the adjusted cost base of the transferor.  The adjusted cost base for the recipient (transferee) is the fair value to which would be added any new costs for land improvements.

Any subsequent sale by the recipient will be taxable if the selling price exceeds his adjusted cost base.

I would note that the person asking the question was not clear as to whether this was a transaction between spouses.  If the transfer (gift) is from one spouse to another it goes at the adjusted cost base of the transferor unless both parties elect to have the value at some higher value.  The election can pick any value above the adjusted cost base up to the fair value but not in
excess of that amount.

The basis of determining the value for tax purposes in these types of transactions is generally resolved by looking at similar property
transactions between arms length parties, appraisals, etc.

Trust this answers the question.

Art

The best advice I can give you Steve is  to seek advice from experts. Recruit an accountant, a lawyer, and a financial advisor to form a team of professionals to assist you.  I have always found that when I have to deal with an issue for the first time its a bit of a mystery but for Joe or Josephine the Pro its old hat.

Enjoy the gift whatever you decide to do with it and Happy Capitalism!

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