OK, tax experts, this is a long shot at saving money for a taxpayer. But it just might work.
Parents bought house and 5 acres in the beautiful Tennessee countryside in 1967. (If anyone can think of a tax break associated with beautiful countryside, let me know) Parents' basis in the house, including permanent improvements, etc. is $26,000. In 1998, parents are now elderly and deed the house over to DAUGHTER, and retain life estate so they can live there until they die. In 1998, fair market value was $60,000. Don't know whether parents filed gift tax in 1998 or not.
Father dies in 2003 (probably irrelevant so I'll move on).
In 2004, DAUGHTER, borrows $52,000 against the property and builds an addition onto the rear of her own house. Mother is unable to care for herself, and daughter builds the addition so she can take care of her mother. For two years, daughter has been paying interest only on the borrowed $52,000.
In July 2006, Daughter sells house and 5 acres for $100,000. The check is made out to
Daughter and Mother -- and the title company tells daughter that her mother's name was put on the check because Mother had retained a life estate in the property. Closing costs are some $8,000, netting $92,000 before paying off the mortgage.
If we cut to the chase, looks like Daughter has a sale for $92,000 and a basis of $26,000, for a $66,000 capital gain. However, $52,000 of this money is tied up in daughter's own residence (meaning this much of the proceeds were PRE-invested, not RE-invested in own residence).
I would LOVE to hear that the so-called "life estate" allows for a stepped-up basis, either to $60,000 or $100,000 but I think these "lifetime trust" devices are transparent to IRS. I would also LOVE to hear that the investment into taxpayer's residence can lower the gains, but I don't think so. I would LOVE to hear that her mother can report this instead of the daughter because the check was made jointly.
Whad'dya think? Are we up against the wall with this $66,000 capital gain? Can anyone think of a break somewhere?
Thanks a bunch, Ron Jordan
Parents bought house and 5 acres in the beautiful Tennessee countryside in 1967. (If anyone can think of a tax break associated with beautiful countryside, let me know) Parents' basis in the house, including permanent improvements, etc. is $26,000. In 1998, parents are now elderly and deed the house over to DAUGHTER, and retain life estate so they can live there until they die. In 1998, fair market value was $60,000. Don't know whether parents filed gift tax in 1998 or not.
Father dies in 2003 (probably irrelevant so I'll move on).
In 2004, DAUGHTER, borrows $52,000 against the property and builds an addition onto the rear of her own house. Mother is unable to care for herself, and daughter builds the addition so she can take care of her mother. For two years, daughter has been paying interest only on the borrowed $52,000.
In July 2006, Daughter sells house and 5 acres for $100,000. The check is made out to
Daughter and Mother -- and the title company tells daughter that her mother's name was put on the check because Mother had retained a life estate in the property. Closing costs are some $8,000, netting $92,000 before paying off the mortgage.
If we cut to the chase, looks like Daughter has a sale for $92,000 and a basis of $26,000, for a $66,000 capital gain. However, $52,000 of this money is tied up in daughter's own residence (meaning this much of the proceeds were PRE-invested, not RE-invested in own residence).
I would LOVE to hear that the so-called "life estate" allows for a stepped-up basis, either to $60,000 or $100,000 but I think these "lifetime trust" devices are transparent to IRS. I would also LOVE to hear that the investment into taxpayer's residence can lower the gains, but I don't think so. I would LOVE to hear that her mother can report this instead of the daughter because the check was made jointly.
Whad'dya think? Are we up against the wall with this $66,000 capital gain? Can anyone think of a break somewhere?
Thanks a bunch, Ron Jordan
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