Real world tax discussions at the top brackets...

[degsme]

I sent a lawyer buddy an email. If he grants permission, I'll post his answer.

As I recollect, selling it at below market value incurs a tax penalty. So if she sells $100k value for a $1 in cash, that counts as a $99,999 profit.

OTOH, she could set up a trust, donate the property into the trust and make the beneficiaries of the trust her kids. That's essentially how the Ochs/Schulzburger clan continues to keep the NYTimes wealth going forwards. The trick is that you then give the trustees the right to rent the property at "market value" - which of course can be determined at convenient rates by pet assessors - and essentially "pay them" a "salary" equal to the "rent plus taxes". So in essence they get to be trustees, use the property and pay no taxes.

But this is not for the faint of heart to do. And you need good lawyers to sort this out. PLUS it needs to be done more than 3 years before probate.

 

[Woolleybugger]

I think they went down this road with the other properties....she wanted this to be a clean deal...ain't gonna happen.

 

[Woolleybugger]

You hit it on the head. The revenue from the 8 acres of Avos and the orchids runs less than 100 grand a year net. The land is worth around 2 million or more. Easier to just sell than to work to make 100 grand in a good year. Farming is hard work and a small farm has no economy of scale.

 

[BrianDamage]

Can you send me something that proves this so I can forward it on to them?

Heard back from my buddy:

As is usually the case with most legal issues, a simple "yes" or "no" is not possible.

There are basically three federal tax systems: a) income tax; b) gift tax; and c) estate tax. There are also state income taxes and in some cases state inheritance taxes. Usually, the state law follows the federal, although that is not always the case. I will address federal law.

For income tax purposes, if the total amount paid for the property, cash AND other consideration of value, if any, is really, truly, only one dollar, then the sale is a valid sale and generates only $1 of gross income.

However, if you are thinking of claiming a deductible capital loss for the property, do not expect the IRS to consider the sale as valid. It would almost certainly consider the sale to be a disguised gift. You cannot claim a taxable loss for anything you give away.

For gift tax purposes, by "selling" for $1, you would make a gift of the fair market value of the property, less one dollar. So, if the property were actually worth $100,000 and you sell it for $1, the gift is $99,999.

Is this subject to any kind of tax? For most people, the answer is "No." You can give away a large amount (the last I checked, $5,000,000) during your lifetime without incurring any gift tax. For purposes of figuring out your total lifetime gifts, there is also an annual exclusion amount. For many years this was $10,000 per person per year. Currently I recall that it is $13,000. If your total life time gifts, less annual exclusions, and including this property are less than $5,000,000, then there is no gift tax to pay. If you are over the $5,000,000 mark, there is gift tax to pay. Although the IRS cracked down a few years ago, almost no one pays the gift tax, even when they legally owe it.

Lastly, there is federal estate tax. This is a very complicated subject. Worse still, the law is in a state of change right now and it is impossible to predict with confidence what the law will be in the future. The estate tax and the gift tax are related tax systems. To perhaps oversimplify, if gift tax is not an issue under your circumstances, neither is federal estate tax.

I'm happy to answer a basic question, but anyone planning to act on my answer should consult a lawyer licensed in their state.

 

[Woolleybugger]

Great stuff, thank you.

 

[degsme]

To clarify... On the Gift Tax... the GIVER only pays a Gift Tax if it is over $5 mil. But THE RECIPIENT has to declare gifts as "unearned income". and you can only have an annual $13k Unearned income that is untaxable. After that it gets treated as "income" that is also subject to AMT if I recollect correctly (ie it drives up your AMT basis 1:1 with no exemptions).

Since this is CA - they really need some good lawyers.

 

[degsme]

You hit it on the head. The revenue from the 8 acres of Avos and the orchids runs less than 100 grand a year net. The land is worth around 2 million or more. Easier to just sell than to work to make 100 grand in a good year. Farming is hard work and a small farm has no economy of scale.

RIGHT. and if "the market should decide" - which is what Free Market Theory says... then The Market putting a value of $2 million on the property is saying:

Sell the land for what it is worth - and if you want to keep farming - go buy some land worth $1.1 mill someplace else. Then you will be earning 9% ROI and have $900k capital to reinvest.


Essentially the whine about "taxes killing the small farmer" is simply not so. What is killing the small farmer is that they are ECONOMICALLY INEFFICIENT WHERE THEY CURRENTLY ARE. So why should we as a society subsidize this economic inefficiency?

 

[Woolleybugger]

The giver pays the tax? I had no idea that is how it is set up. I thought only one side paid the tax.

 

[degsme]

The giver pays the tax? I had no idea that is how it is set up. I thought only one side paid the tax.

The GIFT Tax http://www.irs.gov/businesses/small/article/0,,id=164872,00.html is something paid by the Giver. INCOME tax is something paid by the recipient.

The reason for this is so that you create a disincentive for large, last minute "gifts" designed to circumvent income and estate tax laws.

 

[degsme]

I think they went down this road with the other properties....she wanted this to be a clean deal...ain't gonna happen.

Well she could do it "clean deal"... but then her heirs get to pay taxes on the income. She could simply gift them the value... But they get to pay their fair share of taxes on it. And The Government isn't preventing her from giving her money to anyone she sees fit. Its just treating it as the unearned income it is.

 

[Wulk]

You're living in the dark ages mate.

 

[Woolleybugger]

I am? I have been to the UK many, many times. Opened up offices there and employed folks from all walks of life. If you are saying you are not a class based nation then you are kidding yourself. There is a reason you still have the House of Lords and the monarchy. It's part of your culture and you should embrace it old chap. Cheerio and toodleloo...

 

[Woolleybugger]

Well on this one I have to say that this free market affect on our farming and small businesses is one of the things that is keeping us from having healthy lifestyles and more choice in food and other goods and services. I would argue that it is very much in our interest to keep these intact but only if they indeed do farming or ranching or making cheese, bread and so on. Look at France when you get there and you will see how wonderful it is that they have so many small producers of food. I want more small business and less agribusiness myself. But I don't think this is due to taxes. i think it is due to the hard work it takes to stay in these businesses and the lack of interest of children in the work their parents did. Our kids don't want to work the farm, its too damn hard.

 

[Woolleybugger]

And I thought the gift tax was just an extra tax on the recieving end...interesting.

 

[degsme]

Well on this one I have to say that this free market affect on our farming and small businesses is one of the things that is keeping us from having healthy lifestyles and more choice in food and other goods and services. I would argue that it is very much in our interest to keep these intact but only if they indeed do farming or ranching or making cheese, bread and so on. Look at France when you get there and you will see how wonderful it is that they have so many small producers of food. I want more small business and less agribusiness myself. But I don't think this is due to taxes. i think it is due to the hard work it takes to stay in these businesses and the lack of interest of children in the work their parents did. Our kids don't want to work the farm, its too damn hard.

OK I can buy that. But then lets stop pretending that "social engineering with fiscal policy" is a BAD IDEA..

 

[trapdoor]

I have no problem with it myself. I am surrounded by old money and these folks are lazier than shit. Sure they play around with wineries, avocadoes, horses but none of them has ever really worked a day in their lives and not one of them has ever faced any risk making them quite silly mostly. My brother used to play softball on a traveling slo pitch team that was fully sponsored by an Bloomingdale heir. I know him really well too. Great guy. His daughers wedding in Cabo was covered in the New Yorker. He has never worked a day in his life. He has a giant avocado ranch next to the most expensive property listed in california right now. His other home is in a fabulously wealthy enclave on the country club. He is a season ticket holder for the dodgers. When my bro was dying of cancer, he invited me and my bro to a game. Each seat was 1000 dollars per game. We were right on the third base line, first row

.

And so somewhere -- his parents, his grandparents, someone was successful and passed the wealth on to future generations -- committing a life's work to their prosperity. yes, I suppose we should condemn the idea that we can leave something behind.

I am for letting heirs inherit a certain amount because I agree that you do want your kids to be comfortable.

Who gets to decide how much is "comfortable." According to Degme, NBA players aren't rich -- only NBA team owners are rich.

But the amount of money now being created and accumulated is so enormous that it serves no economic purpose to allow it to sit around and not be recirculated. Get that dough back in the economy so we can spread it around. If you don't, then the Fed is going to have to create more fake money to replace it anyway.

That makes what sounds to me like an a priori assumption -- that the "dough" belongs to the fed or the economy first, and to the dough's owner-of-record second. Take the example you offered above -- it sounds to me like that inherited dough was in the economy, sponsoring slo-pitch teams, buying good Dodger's seats, etc.

 

[Lukey]

Why is this any of our business? At all? This is ridiculous. Whenever property or financial assets change hands make the new owners pay the capital gains taxes and then give them a basis equal to the market value on which they paid the tax. No estate tax needed. Done! Next problem...

By the way, is their house the one that sits next to the canal?

 

[trapdoor]

No Trap I think the problem is that you are too credulous. And you don't hold these folks to the same economic standard as you do - say the poor.

The reason they cannot run the farms profitably are not taxes. Becuase if that was the case, they would not be able to sell the farm at all since no buyer would be able to run the farm profitably either. so that claim does not even pass the smell test.

Degs -- as seen elsewhere in this thread, the inheritance tax is a moving target and even professionals can't predict it out-of-hand. But let's say your farm is on land unencumbered by liens and it is just over the margin (in value) of $3 million, and it earns the family bout $100K after taxes each year, as it has done for a couple of generations (adjusted, of course, for inflation). The current owner dies -- the heirs have the option of coming up with half the value of the farm, which means mortgaging, which means the farm no longer generates that steady income on which the family can live, or the farm can be sold.

It doesn't matter if the farm can be worked profitably by the new owner -- they aren't going to work the land. The can hold it, unworked, in the hopes that its value will increase and they can sell it, or they can develop it as a strip mall. The farm, as a farm, is destroyed and the family is no longer a freehold farmer, but takes whatever profit it has generated and becomes employees.

That's the sort of thing I've seen happen.

A large scale commercial Grower will be able to run the mower and the baler at full rates dawn to dusk all week long. Fully amortizing the costs.

I don't know of anyone who runs a baler for profit -- it might happen out west where grass is at a premium. In farm country, hay is grown on fallow ground to put nitrogen back into the soil, and people turn cattle into it or bale it for use in upcoming years.

 

[degsme]

That's not quite accurate. What you saw was an expert, not paid, who is NOT IN THAT STATE, refuse to be definative and issue an actual professional opinion. The reality is that while the edges of the estate law have been tinkered with, the law itself is prettysolid.

Now as to your example. your numbers are simply wrong on how the estate tax works (btw the exemption is $5 mil) http://www.irs.gov/pub/irs-pdf/f706.pdf Under your incorrect view, if the Estate is $5,000,001 you owe $2,500,000 in taxes. That's simply wrong. you owe 50 cents in taxes.

So in your example if the Estate were say $6,000,000 and the current owner dies, the heirs have to come up with $500,000 in taxes. That is less than a 10% mortgage.

Even if we go back to your numbers $100,000 after taxes on $3,000,000 in assets is a 3% ROI....THAT'S A BELOW MARKET INVESTMENT What you are asking society to do is subsidize below market investments in Agriculture. If you are going to argue for those subsidies, then you need to make a case for them. Your arguement that

1. it necessarily will no longer be a farm is irrelevant. If THE MARKET does not support that allocation of resources, interfering with the market is market distortion via regulation. Something you claim to abjure
2. it necessarily will no longer be a farm is also NOT ACCURATE. As I pointed out earlier, small farmers are ECONOMETRICALLY LESS EFFICIENT. A large scale farm may well be able to get $250k which is "market competitive ROI"... particularly if they are cashflowing more.
3. The family now has $3,000,000 to invest in other MARKET COMPETITIVE investments which instead of generating $100,000 will generate between $210,000 and $270,000.
4. being a "freehold farmer" is inherently better than being an employee even if the employee earns more

Since your numbers are wrong on what the tax rate would be - then you cannot conclude that "that is what you saw happen".

And yes some farms get sold and become strip malls.... That is what THE MARKETPLACE is demanding. Why should we as a society SUBSIDIZE BAD ECONOMIC INVESTMENTS?

A large scale commercial Grower will be able to run the mower and the baler at full rates dawn to dusk all week long. Fully amortizing the costs.

I don't know of anyone who runs a baler for profit -- it might happen out west where grass is at a premium. In farm country, hay is grown on fallow ground to put nitrogen back into the soil, and people turn cattle into it or bale it for use in upcoming years.

ALL farm equipment has an ROI associated with it. So if you are managing your farm PROFESSIONALLY, then you amortize the cost of operating your baler over the profits its usage generates. Hay sales are big business all around the nation. Perhaps a bit less so in Iowa, but even if you are only growing it to feed your own cattle, the ROI then is the cattlefeed costs you save.

And when you go to file your taxes at the end of the year, your accountant includes the depreciation costs of the baler into the costs of the farm, as well as the other PRODUCTION COSTS of the hay you fed your cattle. Thus you are making a profit on the hay (if you are being smart). That profit may only be the difference in what you would pay for commercial feed vs. the production costs (including amortization of the baler) of your own hay - but that had better be a profit, or you are making bad business decisions.

A LARGE SCALE Farm, amortizes that baler over the full haying season running it at full capacity. Thus the COST OF OPERATIONS of that Baler is lower than for a small farmer. QED the large scale farm is MORE EFFICIENT.

Going back to your example, the amortized ROI cost of that baler to that farm might be $10,000/yr, generating $300 cost savings over commercial feed. Meanwhile, a commrecial farm may well be able to get that ROI cost down to $5,000/yr because it is being used on three times as many fields (more useage means more repair costs so you don't get a 1:1 savings). But suddenly your profit for growing that hay goes from $300 to $5300. SImply by selling to a larger scale farm.

And in fact THAT is what we are ssing in the midwest.

 

[degsme]

Why is this any of our business? At all? This is ridiculous. Whenever property or financial assets change hands make the new owners pay the capital gains taxes and then give them a basis equal to the market value on which they paid the tax. No estate tax needed. Done! Next problem...

Well on this we agree. I'd be amenable to that. But notice Trapdoor's resistance to that. He wants us to subsidize those sorts of farms where the Cap Gains tax would force a sale of the assets so that they don't have to sell the assets. He wants us to interfere in the marketplace and subsidize below market ROI farms.