b.Land - In Perpetuity (Part 4 of 4)

Time to discuss the fourth part of the Land essay. The third part is located at Land - The Future (Part 3 of 4). The second part is located at Land - The Present (Part 2 of 4). The first part is located at Land - The Past (Part 1 of 4).

In Perpetuity

Although the land may hold the title as estate-in-perpetuity, there is no sure thing. Two things can happen:   (1)   Government-of-the-day may want the land for their roads, bridges or simply their cronies.   (2)   The original owner of the land has passed on.

(1)   Government-of-the-day.   It is of no surprise that the government-of-the-day wants the land for their own use. You can't fight them. No matter how hard you try to fight, you will end up losing it. So make the best use of the trade, sell the land at its best value and try to buy in exchange an equivalent or bigger piece of freehold land else where. There is no shame. However, no matter how little or much money, plough everything back into the purchase of a new land. Never ever use a single cent you receive for own pleasure. That way, its monetary value of the land is optimized and retained. This is blood money.

(2)   The original owner of the land has passed on.

"Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."
   —   Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789

Although estate duty may or may not be implemented in the country, somehow the government-of-the-day will find a way to eat.

Take for example, the land was bought by the original owner at $100. After 30-50 years, it would easily have appreciated to 15-25 times of the original price, i.e., $1,500-$2,500. Let's say, $1,500. Based on common law, the appreciation would have been $1,400 (=$1,500-$100). It is usual that 50% of this amount is taxable, i.e., $700 is taxable (=$1,400/2). it is also usual that 35% of this amount is tax, i.e., $245 (=$700x35%). Based on the appreciated and latest current value of $1,500 at the point of death, the tax is $245, i.e., 16.3% (=$245/$1,500 x100%), approximately 17%.

It is usual that we would usually ignore the initial paid price for the land, i.e., we don't consider $100, the initial purchase price. So the tax amount is $263.50 (=35% of $1,500/2), i.e., 17.5% of current value (=$262.50/$1,500 x 100%).

Two ways out:

(1)   As soon as your heir is 21 years old, put his/her name into the land title as joint-tenant. That way when you pass on, the heir will automatically become the sole owner and kick this taxation problem to a much later date. When his next heir comes of age, he/she can do the same thing. The tax payable at each time is minimized and made manageable.

(2)   The 17.5% tax can be saved from rental income of about 3-5 years. Make sure you save this amount just before you pass on by collecting and not spending the rental income on luxury. Rental income is approximately 3%-5% of the current value per year, i.e., it takes 3-5 years to accumulate enough funds for taxation purposes.

Caveat Emptor

If you don't prepare to pay this amount of tax, you will lose all land due to forced sale by the government-of-the-day. If under forced sale, the discount could be easily from 20%-75% of current value. Under such circumstance, it is going to be a very sad day.

This is not yet a well-thought-through essay but it is good enough till I have more solid inputs as I aged.

One more Part

There is however one last and final part to this:   Land - Passing On. This is a very important part, but I have no idea on how to proceed. If I split the land ownership equally, I will have small but fair parcels for each heir. This will affect the economy of scale of land ownership. If I give the largest share to one heir, this will give the maximum economy of scale of land ownership, but it may not be too fair to the other heirs.