Real Estate Inheritance Tax Question

[dave]

My JP father-in-law purchased land in the 1980’s during the bubble. I think for about Y40M. It was never developed and he passed away a few years ago. So, my mother-in-law got the land. She plans to sell the land at about Y20M (a significant loss). Can she use that Y20M loss to offset her taxes or will that simply be viewed as Y20M gain and be taxed accordingly? My wife believes the latter but I’m not sure. Help pls.

[Tkydon]

This is a complex question because it includes a Capital Loss on the Land during the life of the Father-in-Law, Inheritance Taxes on the Father-in-Law's estate, and then disposal of the inherited land shortly after the inheritance.

You should seek advice from a qualified Inheritance Tax Professional.

1. What is the current designation of the land? Agricultural, Residential, Timber Land?
2. Where is the land located?
3. What is on the land? Any structures / buildings, etc.?
4. What is the current use of the land? Is anyone living there?
5. What was the value of the Land assessed at the time of your Father-in-Law's passing?
6. How much Inheritance Tax was paid on (just) the Land Portion of your Father-in-Law's Estate?

I seem to remember (in the fog of my Alzheimer's) that there is something special in the Tax Law about selling inherited real estate shortly after inheritance... Anyone remember?

Ah, Found It!

Income Tax Law Enforcement Order 所得税法施行令- Article 39
When an inherited property is sold or transferred within 3 years after the date when the Inheritance Tax Return regarding the inherited property is due (i.e. 10 months after the Taxpayer 'learns of the death') (i.e. assuming they learned of the death immediately, within 3 years and 10 months of the death), the Inheritance Tax paid on the property is deductible in computing the Capital Gains derived from the sale / transfer of the property.


I have a feeling that the Tax Basis for the your Mother-in-Law is not the price your Father-in-Law paid for the property, but the value of the property at his death, when she inherited it, as it was not sold and the Capital Loss was not realized in his lifetime... (I maybe wrong. Can anyone confirm?)
(This would mean the Capital Loss is gone, and cannot be reclaimed).
(In any case, Capital Losses can only be deducted from Like Capital Gains. i.e. Capital Loss on Land, etc., can only be offset against other Capital Gains on Land, etc..)

If this is the case, Capital Gains Tax would only be payable on any Taxable Capital Gain; the difference in value between the value of the Land on your Father-in-Law's death and the Sale Price, minus expenses, legal costs, etc., and as above, if within 3 years and 10 months of his death, minus any Inheritance taxes paid on the Land... plus...

Then, there are some complicated Deductions / Allowances, depending on the current use of the land, what the land will be used for after the sale, when the land was purchased, and to whom it will be sold... I won't give the numbers, as I don't want to set a false expectation at this point...

This should mean that, (YOU NEED TO CHECK THIS!) after all expenses, legal fees, deductions and allowances, the Capital Gain since your Father-in-Law's passing may not be large enough to qualify for Capital Gains Taxes, and you Mother-in-Law may not have to pay any Capital Gains Taxes from the proceeds.

Can anyone confirm?

If there is significant Capital Gain over the Tax Basis (the value at the time of your Father-in-Law's passing) minus the sum of all expenses, legal fees, deductions and allowances, then there is an additional piece in the Tax Law;
Generally, real estate held for MORE than 5 years is subject to regular Capital Gains Tax; 15% National, 0.315% Reconstruction, and 5% Residential Taxes.

However, real estate held for LESS than 5 years is subject to Short-Term Capital Gains Tax; 30% National, 0.63% Reconstruction, and 10% Residential Taxes... but this is reduced to only 15% National, 0.315% Reconstruction, and 5% Residential Taxes if the land is sold to the National or Local Government..
I DO NOT know when this period would start in this case! At the time of your Father-in-Law purchased the land, or his passing, or after the date when the Inheritance Tax Return regarding the inherited property is due (i.e. 10 months after the Taxpayer 'learns of the death')... ???
Anyway, hopefully, there won't be any taxes to pay...


I seem to remember there was an article in Ben's Monday Blog some weeks or months ago about legacy remote land transactions from the Bubble, and the realtors who now act as if they're trying to sell the land, but just collecting fees, with no possibility of ever finding a buyer ;-(
Hope that isn't your case...