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.

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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