tax, trust, inheritance question

[masraum]

So, a relative dies and leaves 100 acres of land to a trust and you are a member of the trust. The land also includes small oil well that ends up paying out a couple grand a year to the beneficiaries. They get taxed on the income from the oil well every year.

The question is this. The trust sells the property and you get a cut. How does this affect your taxes. Since the money is essentially an inheritance, I wouldn't think that you would get taxed. But I suppose it may make sense to pay capital gains on the difference in value from when the relative died and now. Or will you pay taxes on all of it, or none of it.

Does anyone have any idea?

[jwasbury]

If the property passed through the estate, it was included in the estate (and potentially taxed) at fair market value at that time and the tax basis of the property in the hands of the trust should be the same value. I'd expect the trust should have been filing it's own tax returns to report the oil income and reporting that income to the beneficiaries on K-1 forms. In the event the trust sells the land, the difference between the tax basis and sales price should be long term capital gain, as you figured.

The only wrinkle I can think of is there are some funky tax rules re: oil and gas which I have no first hand experience with.

[masraum]

Jacob, thanks. Yes, a K-1 was received every year for the disbursements. So it sounds like the only issue will be capital gains.

Thanks again.

[Neilk]

So since we are talking inheritance taxes, is it true, that a foreigner can give you an unlimited amount of money without a tax consequence in the US as long as you file Form 3520? That's how I read the IRS site.

Obviously, they would be bound by whatever rules in their home country...

[jwasbury]

Steve, if you're trying to estimate capital gain income on sale of the land, the key factor is what is the tax basis of that asset. I believe that tax rules for oil and gas production allow you to claim depletion expense against income (this is like depreciation, but for the natural resources of land). If depletion expenses have been claimed over time, generally one would reduce the tax basis of the land by the cumulative depletion expense.

Neil, gifts or bequests are not income to the recipient, so should not give rise to any tax on the receiving end. This is true regardless of whether it comes from a US person or not. IRS is pretty keen to catch tax cheats who hide their money offshore, so this is probably why they want the recipient to report on Form 3520.

[DanielDudley]

This is why I have a top notch accountant. No guessing on things like this, I want to know.

[masraum]

Me too, Intuit Turbo Tax, but I'll have to wait until Jan or Feb to get an answer...