Q: I'm planning to divide my 204-acre farm in West Virginia into nine 22-acre parcels. I'm a widow. I'll give my three sons two parcels each. I'll sell the remaining three parcels. How do I compute the gift tax on the six parcels I give my sons? How do I compute the capital gains tax on the three parcels I sell?
A: To compute your gift tax, follow Internal Revenue Service Form 709, "United States Quarterly Gift Tax Return," and the "Instructions for Form 709." They tell and show you how to compute your gift tax, step by step.
Note that you must file the return on or before the 15th day of the second month following the close of the calendar quarter in which you give your sons the land parcels, since the total amount of your taxable gifts exceeds $25,000. Note also (1) that you can deduct $3,000 from the value of the gift to each of your sons (assuming you give them no other gifts that calendar year), and (2) you're allowed a credit against the total gift tax itself (not just a credit against the total value of the gifts) of (a) $38,000 if your gift is given before Jan. 1, 1980, (b) $42,000 if it's given after Dec. 31, 1979 but before Jan. 1, 1981, and (c) $47,000 if it's given after Dec. 31, 1980.
To compute your capital gains tax, include 40 percent of your net capital gain in your gross income. It's taxed at the regular rate for one in your income bracket. You can get this rate from the tax rate table. The 60 percent deducted net capital gain is a tax preference item for alternative minimum tax purposes. But you won't have any additional tax to pay if your alternative minimum tax base (i.e., the sum of your taxable income, your adjusted itemized deductions, and your net capital gain deduction) doesn't exceed $20,000. Above $20,000, the rate is: $20,001-$60,000, 10 percent; $60,001-$100,000, 20 percent; over $100,000, 25 percent.
You may want to consider asking your tax advisor to do both your gift tax and capital gains tax computation.
Q: I want to sell land I own, on an installment contract. That way I can spread out my tax liability. What should I watch out for?
A: Be certain that (1) you don't receive more than 30 percent of the total selling price in the year of sale (calendar year unless you're on a fiscal year basis, then fiscal year), and (2) your installment sales contract shows the buyer paying interest on the unpaid balance of at least 6 percent.
Earl A. Snyder, a realtor, appraiser and attorney who specializes in investment real estate appraising and counseling, answers questions only in this column. His address: 14909 Kalmia Dr., Laurel, Md. 20810.