IRS Interprets FMV?

Does IRS have it's own screwy definition of FMV?

We all know what FMV is and that it results from a fair market. But I'm hearing a bastardization of this when it comes to selling inherited property.

I, and my two siblings, sold a farm within 6 months of inheriting it last year. We know the concept of stepped-up basis but who knows what the FMV was?? The farm had been in the family since 1916. We didn't hire an appraiser. We put the property on the market and asked a reasonable price according to what we saw in the market. We took an offer nearly 20% less.

To me, that's the real life example of FMV establishing itself.

But now cometh tax time, and my brother decides he owes taxes on his share of the sale and sought "expert advice." What he got was a simpleton's answer, that is, to look at the county tax appraisal for assessed value in order to calculate his tax. That made me laugh.

Unfortunately, you can even find this answer on the web.

In my opinion I owe NO tax. Will IRS see differently? Do they have another understanding of FMV?

I don't believe I have to REPORT anything. What's to report? I received no income. I sold immediately and made no improvements. There was no gain.

But now my brother is going by a different interpretation from his "expert" and will report this sale and pay his tax.

I believe this probably happens alot because people don't understand the term. I expect the same from an IRS auditor should I be called in.

But am I wrong?
Any advice going forward?

Assuming you sold the property to an independent 3rd party, it sounds like you sold it for FMV (I assume your realtor suggested teh sales price). Hire a CPA to assist with your taxes and present the question to them. This is worth the money to get an independent opinion.

If the property went through probate, did the probate court order an appraisal? If not, then how was value of the estate determined when assessing probate costs?

An appraisal of the value of the property at the time of death is needed for more than just calculating the stepped-up basis. The deceased's estate also needs it to determine whether there is any federal estate tax liability. The probate court and the attornies who handle probate often base probate costs on the value of the estate.

If the property is not sold immediately, how do you know that you did not have some appreciation since the inheritance and thus some capital gain due. Without an appraisal, how do you know whether you got a good price for the property or the buyer got a steal?

If comps are available, suggest you ask for sale prices in the three months preceeding and the month following the date of death. Calculate the sale price per acre for each comparable property sold and get an average price per acre. Use that average price to calculate a reasonable estimate of the value of the property you inherited.

Document your work in case your return is audited. Tax assessor's cost may be accurate if it is based on market value and was reassessed recently. Often, tax assessments do not reflect the true market value of a property.

KB:

In an awkward sort of way, I agree with you.

Firstly, the farm for estate purposes should have been appraised. The fair market value should have been established as of the "date of demise". That value should have been established by a disinterested third party-an independent appraiser. If the estate was under 2 million and provided there had not been any previous gifts--- there would not be any gain over that short time (6mo) that you held it. That premise would be very easy to defend. You owe no tax. You need to consult a good CPA.

Your definition of fair market value (FMV) is flawed. But,some things happened which helped to establish FMV. You offered the property on the open market for a reasonable period of time . It was an arm-length transaction. It was not a distressed-forced sale. Financing was not unusual, you used a broker etc. etc.--RIGHT?????

Your brother's attorney is wrong. The assessed value of the farm is NOT fair market value. When was the last time the farm was assessed? Tell your brother's attorney that you will buy his personal residence or business at its assessed value. You'd make yourself a very good deal and he wouldn't begin to entertain that offer. It's toooooo low.

You should take your brother along with you when you see the CPA, and before he files his taxes. If one pays and one doesn't pay that may be enough to trip an audit flag.

See if you can get some similar comparable farm sales from the production credit bureau or what ever they call it now. Since farms don't sell that frequently,sales one or two years old will be necessary. Naturally, the more recent and the more proximate to the property, the better. Also, get some comps from farm appraisers and farm real estate brokers in the area. You should do that NOW because the knock on your door may not come for a couple of years. You would need to divide the farm and comparables into at least three catagories. Woodland,pasture, and tillable acreage. Then compare each category. Get an average price per acreage for each type. Multiply by the number of acreages you farm has (example Woodland: $4000/A x20 acres). You'd also need to guestimate the value of any improvements (barns,residences,silo,etc.) on both the farm and the comparables.

In the mean time, take your brother to a CPA who can make him see the error of his ways.