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When sale of inherited land can be a taxable event

Q: Recently my great aunt died and left an estate (home, farm, investments) worth about $1 million. I am to receive about one-sixth of that. I know the estate will prepare an estate-tax return and pay taxes, but do I need to report the $150,000 or so that I receive as income on my tax return? In the same year, my grandmother passed on and left me a share of her farm, I agreed to sell my portion of the land to a cousin for $20,000. Do I also need to report the $20,000 as income on my 1040?
F.N., Bowling Green, Ky.

A: "Normally, inheritances are not taxable unless part of the proceeds are unusual, such as coming from retirement accounts that were not taxed, or there is a capital gains incurred after the date of your inheritance," says Gary Schatsky, an attorney and fee-only financial planner in New York. Neither your cash nor land inheritance appears to be a taxable event, says Mr. Schatsky. Assuming that is the case, you would not enter them onto your 1040.

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But there could be an exception on your grandmother's land. If the land was valued at a lesser amount at the time of inheritance – say, $15,000 – then you might owe capital gains taxes on the $5,000 profit from the sale. If the land's inherited value was $20,000, there would be no tax, he says. Need more help? Call the IRS tax-information hotline, at 800-829-1040.

Q: My husband and I have had financial problems recently, complicated by problems with our health insurance. We now owe more than a few thousand dollars in medical bills. We also owe several thousand on our credit cards. We are working our way back to fiscal well-being, and we've been offered a settlement of 50 cents on the dollars by several creditors. Should we settle, or will that ruin our credit?
B.V., via e-mail

A: "Paying 50 cents on the dollar is almost like making a 50 percent profit," says Paula Hogan, a financial planner in Milwaukee with Hogan Financial Management. "How could you not go with it and settle those debts?" she asks. Make sure you get a written statement from the creditors that the debts are fully cleared.

"Anything that lowers your debt-to-income ratio is good and should improve your credit score," says a spokeswoman for the credit reporting agency Equifax.


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