inherited property

[oceanlovin'ea]

Mr. X transferred his home to the name of his 2 children in 2002 and retained a life estate.

He died in 2007 and the property was finally sold for a loss in 2009.

I'm not sure what date I put for date home became clients. Is it the date of death or 2002?

It doesn't actually become their property until the man dies, does it?

Thanks

Linda

[Koss]

Life Estate

You're probably not going to like this answer...

First, does the date really make a difference? Were they holding the property as an investment? Was it rented to a tenant? Is there depreciation involved? Is there a meaningful deductible loss? Or is it simply a nondeductible loss on their personal residence?

Here's what's bothering me:

When the father "transferred his home to the name of his 2 children and retained a life estate," he transferred a partial interest in the property. He retained a life estate, which is ownership until his death. But he irrevocably transferred something else, known as the remainder interest.

So technically, you have two different assets: the life estate and the remainder interest. His children acquired the remainder interest while he was alive, when he signed the deed. They acquired the life estate when he died. Now that they own both parts, the own the entire entire asset. But prior to his death, the ownership was divided into two separate assets.

Are there gift tax implications?

It gets better.

If there is a deductible loss on the sale... well, see, they sold the entire house, or both parts. They sold both the life estate and the remainder interest. By selling both components at the same time to the same buyer, they "unified" the two assets. But since they acquired the two assets at different times, and by different methods of acquisition (one by gift, one by inheritance)... their basis in the two components is different.

Depending on the size of the estate and the value of the house, you may have a fairly complex valuation issue on your hands.



I'm really flying by the seat of my pants here. Hopefully someone else will have some more knowledgeable input on this.

BMK

[Gene V]

Google search

Enclosed are two google search on life estate. Both say you get FMV of property.

I'm not sure-will have to do more research.

Question
Does having a Life Estate mean that after the life tenant's death you inherit the property at its fair market value as of the date of the life tenant's death, and that the appreciated property will have a higher cost basis (not the original purchase price cost basis) and should be able to be sold shortly after the transfer's death with negligible, if any capital gains? Also, how do you determine the higher or stepped up cost basis? I would appreciate the answers to these questions.

Thanks

Answer
John,

Thanks for your question.

When a person grants a life estate in property, he/she is reserving the right to use the property for their remaining life. Upon death, the beneficiary gets the property.

The property in received at that point with a basis of FMV as of the date of death. The value is determined by appraisal or market prices, depending on the nature of the property.

This means that an immediate sale would probably result in little gain, likely a tax deductible loss.

Hope this helps.

John Stancil, CPA

This website gives more information.

http://www.laweasy.com/q/20090114222634/life-estate-tax-impact

[oceanlovin'ea]

can of worms

well, that opens up a whole new can of worms, doesn't it?

Why would someone do a life estate unless their estate was in the millions of dollars.

This man owned his home and another piece of property. It seems to me that a trust would be a better vehicle to move the house to children's names.

[Burke]

So technically, you have two different assets: the life estate and the remainder interest. His children acquired the remainder interest while he was alive, when he signed the deed. They acquired the life estate when he died. Now that they own both parts, the own the entire entire asset. But prior to his death, the ownership was divided into two separate assets.
If there is a deductible loss on the sale... well, see, they sold the entire house, or both parts. They sold both the life estate and the remainder interest. By selling both components at the same time to the same buyer, they "unified" the two assets. But since they acquired the two assets at different times, and by different methods of acquisition (one by gift, one by inheritance)... their basis in the two components is different.I'm really flying by the seat of my pants here. Hopefully someone else will have some more knowledgeable input on this.BMK

You are correct in your assumptions above about the ownership of the house. Had they sold it while he was still living you would have two separate tax treatments of the part calculated as the life estate interest which would be reported by father, and the part deemed gifted (remainder interest) which would be reported by children. But, since they sold it after he died, they get basis at FMV on DOD.

[Burke]

well, that opens up a whole new can of worms, doesn't it?
Why would someone do a life estate unless their estate was in the millions of dollars.
This man owned his home and another piece of property. It seems to me that a trust would be a better vehicle to move the house to children's names.

Generally it is for Medicaid or Medicare purposes. And they want to make sure the kids don't throw them out on the street.

[JG EA]

You are correct in your assumptions above about the ownership of the house. Had they sold it while he was still living you would have two separate tax treatments of the part calculated as the life estate interest which would be reported by father, and the part deemed gifted (remainder interest) which would be reported by children. But, since they sold it after he died, they get basis on FMV at DOD.

Yes, I agree. The gift part is not the worry of the kids. The gift occurred at the time of the redeeding (New Word!). If there was an estate tax return required then it may be an issue for that return, but again not for the kids. They have inherited the house.

[Burke]

The gift occurred at the time of the redeeding (New Word!)

I like "redeedification" better.

[Kram BergGold]

What I was told

I was told by a lawyer that in the situation where a house was inherited that had been in a life estate that you can't claim a loss. Maybe the thinking goes something like this. As there is a part of the hosue with gift basis and part with step up basis when you figure from gift basis you get a gain and when you figure from steo up basis you get a loss which cancel each other out .

[Kram BergGold]

I Take My Last Post Back

If the giver of a life estate dies, the property given away is counted as an estate asset of the decedent and gets a full step up. If the property is sold before the giver dies then you get involved with using actuarial tables to determine basis.