Inheritance or Taxable Event?

[duanecpa]

Situation:

Dad and Mom quit claim deed their home to the children (3):
Dad and Mom live in the home until their death (Dad and Mom pay all costs associated with operating the household - no rent is paid to the owners (grown children).
Children (3) decide to sell Dad and Mom's home upon their death.
Children (grown) now receive a 1099-S for their portion of the gross proceeds from the sale of Dad and Mom's home.

With the above facts, how does one handle the 1099-S in the name and social security number of one of the grown children - my client?

Thank you.

[ChEAr$]

Situation:

Dad and Mom quit claim deed their home to the children (3):
Dad and Mom live in the home until their death (Dad and Mom pay all costs associated with operating the household - no rent is paid to the owners (grown children).
Children (3) decide to sell Dad and Mom's home upon their death.
Children (grown) now receive a 1099-S for their portion of the gross proceeds from the sale of Dad and Mom's home.

With the above facts, how does one handle the 1099-S in the name and social security number of one of the grown children - my client?

Thank you.

Look to the fair market value of the house when parents gave the house to children, then
compute gain or loss. If a gain, it's taxable; if a loss, it's not deductible.

[Burke]

Situation:

Dad and Mom quit claim deed their home to the children (3):
Dad and Mom live in the home until their death (Dad and Mom pay all costs associated with operating the household - no rent is paid to the owners (grown children).
Children (3) decide to sell Dad and Mom's home upon their death.
Children (grown) now receive a 1099-S for their portion of the gross proceeds from the sale of Dad and Mom's home.
With the above facts, how does one handle the 1099-S in the name and social security number of one of the grown children - my client?
Thank you.

Since the parents continued to live in the home until (both?) deaths, they had a life estate, even though it may have been implied. The children report the sale of the home as if they got it at death, with stepped-up basis of FMV. It would have been different if the home had been sold before the last to die.

[duanecpa]

Inheritance or Taxable Event?

Thanks for getting back to me - do you have a publication or other citation for my files?

Thank you.

[Burke]

Yes, there was an excellent article on this in successive issues of TaxPro Monthly magazine published by NATP a year or two ago. Will have to find it.

[dyne]

In my memory I have always thought that a Life Estate was simply ignored and the property was treated as being inherited. But in researching I found that the FMV at the date of TRANSFER is used as the children's basis. If this was years ago, the sales price could be MUCH greater when the house is sold many years later and the children would be required to pay capital gain on the profit. Is this correct? Or is the transfer considered to be the date of death?

[Burke]

The courts have held that a Life Estate situation is treated as an incomplete gift. If an entire interest is transferred without recourse to another party, then it is a gift and basis to the receipient is the donor's basis. So if the house were deeded to the children, and the parent(s) no longer used it as their principal home, then it is a completed gift. The retention of the Life Estate where they have the right to remain there until their death, changes the situation. If the house were sold prior to their death, then the part represented by the life estate is treated for tax purposes under the sale of principal residence rules for the parent(s), and the remainder interest is cap gains to the children. This ratio is calculated using the IRS tables based on the parents' age at the time of sale. If it is not sold until after the parents' death, it gets stepped up basis to the heirs.

[dyne]

Thank you Burke. I understand I THINK! This appears to be a good situation to refer to a local CPA if I ever encounter this. Best wishes.

[duanecpa]

Inheritance or Taxable Event

thank you for the information.

If there is a loss due to the stepped up basis on the sale of the real estate, there is not a loss to be claimed - is there?

Thanks again.

[Burke]

There can be, as this is not considered a personal use asset unless one of the heirs moved into it and used it as a personal residence. In this case it was sold, so there may be a loss due to expense of sale.

[Gene V]

life-estate

Some more information from TTB 21-33 on basis of property

Life-estates and remainder interests. If the decedent owned
the entire property and gifted the remainder interest, the value
of the entire property is included on Form 706 and receives
stepped-up basis.

Example: Marge deeded her home to her children after her spouse
died in 1995. She reserved a life estate in the property which gave her
the right to occupy the property until her death. Her children inherit
the home without probate. The entire value of the home is included in
Marge’s Form 706 and receives stepped-up basis.

[Burke]

That is correct. The reason it is included on the 706 is that it was an incomplete gift, as we were discussing above. Where it gets complicated, is if the house is sold while the parent is still living, such as happens sometimes when they go into a nursing home.