Basis

[GTS1101]

My client and his sister were added on to the title of their dad's home back in the 1990's. The father died in 2010. I was using the cost basis of the father from when he bought the home back in the 70's plus improvements when they sold the home. My client's sister who used another tax person says they receive a stepped up basis at date of death. I thought since they were already on title they don't receive a stepped up basis. Am I wrong on this? Do they use the basis at date of death or basis of the father plus improvements?

GTS1101

[Burke]

It depends. Did he continue to live in the home even after they were put on the title? Did they live there? Did they contribute any monies to either buy their 1/3 share or improve it? If he continued to live in the home, and there was no consideration for their interest, it is considered an incomplete gift and included in the Dad's estate. Therefore when he died, it got stepped up basis. If the home had been sold while he was still living, then his life-estate interest would have come under 121, and their 2/3 interest would have had cap gains applications with their basis being the donor's basis.

[GTS1101]

Thank You! Yes the father continued to live in the home until he died. My client and his sister did not live in the home. There was a quit claim deed done to add them to the title. The father made many improvements and then they made a few improvements after the death shortly before it was sold. I would assume based on your answer that they receive the stepped up basis.

GTS1101

[AJsTax]

Section 121

can carry over to the estaste and beneficiaries. thus no tax liability on the home.

[Gary2]

It depends. Did he continue to live in the home even after they were put on the title? Did they live there? Did they contribute any monies to either buy their 1/3 share or improve it? If he continued to live in the home, and there was no consideration for their interest, it is considered an incomplete gift and included in the Dad's estate. Therefore when he died, it got stepped up basis. If the home had been sold while he was still living, then his life-estate interest would have come under 121, and their 2/3 interest would have had cap gains applications with their basis being the donor's basis.

Regardless of whether he continued to live there, or they paid for it, or whatever, wouldn't the 1/3 ownership that he kept get the stepped up basis in any case? (Or more precisely, be eligible for it under the weird 2010 rules?)

[BOB W]

Adding names to a deed without money being exchanged is a gift. Had it been done correctly, the father should of put the home in the childerns name and added that he had the right to live in the house until he died. That way it would have been considered an incomplete gift, meaning no gift at that time.

Upon the death of the father, the whole house gets a stepped up basis to MV for the children.

The way it was done means that the children get the father's cost basis for 2/3rds and get the stepped up basis for his 1/3rd.

Having said that, you must look at the deed for any attachments that leave all control of the house in the fathers hands and that he will live in the house for the rest of his life, thus creating a "Life Estate". Life Estate's are recognized for a Full Stepup in basis.

Per the thread, it doesn't look like a life estate was established.

[FEDUKE404]

My 2¢ worth - it depends...

While there may be an out (or at least 1/3 of one....) since the dad continued to live there, is it not a reasonable position that since the 1990s the children HAVE in essence already "owned" the house making any inheritance issues related to the full amount a moot point?

(No - I'm not a lawyer.)

On the brighter side, there are mechanisms where the property could have been retitled ("life interest" or something??) using very specific language and the property remains, for all intents and purposes, that of the dad until his death.

Over the years I've seen several instances where parents got creative and "gave away"/transferred assets (for all kinds of reasons to "remove assets"!) and then the children were greatly surprised to have explained to them the conflicting ideas of cost basis for a gift versus cost basis for an inherited asset.

ALSO: So what was the reason for the original title "amendment" and who has been claiming the property taxes/mortgage interest over recent years??

FE

[Burke]

Having said that, you must look at the deed for any attachments that leave all control of the house in the fathers hands and that he will live in the house for the rest of his life, thus creating a "Life Estate". Life Estate's are recognized for a Full Stepup in basis. Per the thread, it doesn't look like a life estate was established.

The rules for Life Estate treatment are clear as to the stepped-up basis rules. What is less clear is whether it actually has to be definitively stated in the deed to be valid. Courts have ruled that life estates can be implied, based on intent and facts and circumstances. The preferable method would be to have it recorded in the deed, but if all the circumstances fit his intent, then it has been upheld.

[Gary2]

The rules for Life Estate treatment are clear as to the stepped-up basis rules. What is less clear is whether it actually has to be definitively stated in the deed to be valid. Courts have ruled that life estates can be implied, based on intent and facts and circumstances. The preferable method would be to have it recorded in the deed, but if all the circumstances fit his intent, then it has been upheld.

I thought that state law prevailed, so I wouldn't consider any sort of broad generalization. I'd ask a local estate planning attorney.

[Burke]

I thought that state law prevailed, so I wouldn't consider any sort of broad generalization. I'd ask a local estate planning attorney.

In the application of Federal Estate and Gift taxes, state law would have no bearing. The courts I was referring to were all Federal Circuit and Tax court cases involving all sorts of different circumstances. Some decisions were for and some against an implied life estate, all depending on the different facts, how the properties were held and used, and in the case of income-producing properties, who got the income and for whose benefit it was used.

I will say this, however. The quitclaim deed mentioned in the OP does throw another element into the equation. Of the different types of deeds, the quitclaim has the least assurance that the person receiving it will actually get any rights. A quitclaim deed does not release the party quitting claim to real property from their obligations under any mortgage or lien secured against it.

[BOB W]

The rules for Life Estate treatment are clear as to the stepped-up basis rules. What is less clear is whether it actually has to be definitively stated in the deed to be valid. Courts have ruled that life estates can be implied, based on intent and facts and circumstances. The preferable method would be to have it recorded in the deed, but if all the circumstances fit his intent, then it has been upheld.

The problem here is that Dad kept his name on the deed...............

[Burke]

Well, you can look at it this way, too. Retention of a 1/3 legal ownership, is even more of an indication of a less than full and complete gift of an entire interest in the property.

[BOB W]

Well, you can look at it this way, too. Retention of a 1/3 legal ownership, is even more of an indication of a less than full and complete gift of an entire interest in the property.

A 2/3 gift was full and complete. You have to look at the intent of the gift. Check the Deed for any attachments.