Holding period

[KWF]

Husband dies and leaves wife life interest in land, with remainder to son. Wife dies 5 years later. Son takes ownership of land and immediately sells it for a gain.

Would son's capital gain be short term or long term?

Or, put another way: Does son's holding period include time of wife's life interest?

[Lion]

Inherited is long term by definition.

If life estate, then son has stepped up basis at DOD of mother. As long as land is in mother's estate. (It wasn't a completed gift from father to son until mother died.) Probably no gain and maybe a small loss due to selling costs.

[New York Enrolled Agent]

Inherited is long term by definition.

If life estate, then son has stepped up basis at DOD of mother. As long as land is in mother's estate. (It wasn't a completed gift from father to son until mother died.) Probably no gain and maybe a small loss due to selling costs.

I'm not sure I agree that FMV on day of mom's death is used for basis. Since mom was only a life tenant on the land, her basis on death = zero. I think the correct basis to be used is FMV when dad died.

[ATSMAN]

You got a point NYEA!

[Roland Slugg]

It wasn't a completed gift from father to son until mother died.

It wasn't a gift at all. According to the OP it was an inheritance from dad when dad died, subject to mom's life estate.

As property acquired from a decedent, the holding period is automatically long term, but the decedent in this case was dad, not mom. Accordingly, the son's basis is the land is its FMV as of the date dad died five years earlier. (Regs §1.1014-4(a)(2)) Since the son's basis dates back to dad's death, the gain could be sizable.

I realize that the OP only asked about the holding period, but the comments about basis may also be welcome.

[Gary2]

Just to be clear: If this had been a case where wife owned the property in fee simple, and then gifted it to her son while retaining a life estate, then the son would clearly get the full stepped up basis upon his mother's death. If it had been sold while wife was still alive, then the IRS actuarial tables get used to apportion things.

In this case, the assumption is that husband owned the property in fee simple (wife had no share), and husband bequeathed the property to son with life estate to surviving wife. In this case, if it had then been sold while wife was still alive, they would use FMV as of husband's DOD as total basis, and again use the IRS actuarial tables to apportion ownership shares to wife and son. Agreed?

But in this case as presented, the theory is that because wife never owned the property in fee simple, it doesn't get pulled into her estate, and doesn't get any step-up from her passing. Sounds reasonable to me (but if I had to sign my name, I'd read the regs more carefully). Agreed?

This leaves one question: Are we sure the wife had no ownership interest prior to the life estate? That's the way the OP reads, but it's worth checking.

[Burke]

The whole thing may hinge on the type of deed. Quitclaim? or Enhanced Life Estate, where wife retained the right to sell? One must look to that document to really determine how basis will be treated upon sale.