Life estate and cost basis for home sale

[FEDUKE404]

Over a decade ago, Granny established a life estate (probably to "get rid of assets" ?) transferring her home and several acres of surrounding farm land to her three children.

Granny died in 2013 or 2014, and the three heirs sold the property in 2015. The house was unused, except for perhaps some family personal use, after Granny's death.

The three heirs (one is my client) recently had the property appraised, and they feel that is a "fair value" to use for the cost basis for the 2015 sale.

It is reasonably clear that for estate/gift tax purposes, the value of the property at the date of Granny's death is relevant.

Does the same hold true for the cost basis for income tax considerations? Or, stated differently, do the children get to show "inherited" ( = LTCG ) and the (perhaps unknown??) value of the property on the day Granny died on their respective 2015 tax returns?

I've advised client to run all by the attorney who prepared the original property transfer some time ago, and perhaps even rattle a tax attorney's cage for a ruling. It should be noted I'm getting all of this "information" second-hand. (Oh yes - the three children are also having some problems agreeing on the "correct" answer to the situation.)

Anyone care to toss in a comment or two? Thanks!

FE

[TAXNJ]

Tax

Over a decade ago, Granny established a life estate (probably to "get rid of assets" ?) transferring her home and several acres of surrounding farm land to her three children.

Granny died in 2013 or 2014, and the three heirs sold the property in 2015. The house was unused, except for perhaps some family personal use, after Granny's death.

The three heirs (one is my client) recently had the property appraised, and they feel that is a "fair value" to use for the cost basis for the 2015 sale.

It is reasonably clear that for estate/gift tax purposes, the value of the property at the date of Granny's death is relevant.

Does the same hold true for the cost basis for income tax considerations? Or, stated differently, do the children get to show "inherited" ( = LTCG ) and the (perhaps unknown??) value of the property on the day Granny died on their respective 2015 tax returns?

I've advised client to run all by the attorney who prepared the original property transfer some time ago, and perhaps even rattle a tax attorney's cage for a ruling. It should be noted I'm getting all of this "information" second-hand. (Oh yes - the three children are also having some problems agreeing on the "correct" answer to the situation.)

Anyone care to toss in a comment or two? Thanks!

FE

Simple. Tax Attorney. Seems this may turn out to be interesting and legally challenging. Why?

Based on your comment " I've advised client to run all by the attorney who prepared the original property transfer some time ago, and perhaps even rattle a tax attorney's cage for a ruling. It should be noted I'm getting all of this "information" second-hand. (Oh yes - the three children are also having some problems agreeing on the "correct" answer to the situation.)

[Kram BergGold]

My Approach

If two years lapsed between D of D and sale, I would have a hard time saying the 2015 value was the same as 2013. I would want someone to appraise based on 2013 comps. Since the heirs used the property after Granny's death, I would not allow them to claim a loss. It was not investment property. Lastly, be careful, some attorney's will tell people whatever they want to hear. They are not doing the tax return.

[TAXNJ]

?

If two years lapsed between D of D and sale, I would have a hard time saying the 2015 value was the same as 2013. I would want someone to appraise based on 2013 comps. Since the heirs used the property after Granny's death, I would not allow them to claim a loss. It was not investment property. Lastly, be careful, some attorney's will tell people whatever they want to hear. They are not doing the tax return.

Would that apply if the Tax Attorney preparers the tax return? Also, some have said some Tax Preparers will tell people whatever they want to hear.

But if you think you could handle the legal issues (if any, based on the post with family members difference of opinions) then that's the way you handle it.

[Burke]

I agree with Kram B. I recently had a sale of inherited property with a statement furnished by the executor that "since the property was sold for its FMV, there is neither a gain nor loss." What? This property was inherited in 2006 when its value was huge. And professionally appraised for Estate Tax purposes. Sold for a big loss. Took some documentation, but that loss will be split 4 ways. My clients were not happy the property was sold, but happy about the tax benefit they will enjoy. If I had not pursued this, all of them would have claimed nothing.

[TAXNJ]

Ok

Interesting if FEDDUKE will be able to let us know how it was finally handled.

[FEDUKE404]

Explanations

Interesting if FEDDUKE will be able to let us know how it was finally handled.

Heard from (my) client today and they are working on it with 1) lawyer who set up initial transfer from Granny and 2) tax attorney to interpret same and hopefully state "This IS the cost basis" or something like that.

It's my understanding the (farm) house was modest in size, and farm land values likely have not changed significantly in the last couple of years.

My original concern was children would be stuck with Granny's original (low) cost basis, but that does not seem to be likely.

The general story I've heard is the "sale costs" were minimal, possibly neighboring farmer/friend bought the land??, so there is a good chance they made a small profit or incurred a small loss **IF** the value at death determines. Hadn't given much thought to "investment property" (it definitely was NOT business property) and to whether they could potentially show a Sch D loss.

When I get more facts, I will post them here.

FE

[Lion]

Their basis is the DOD basis on the 706 or with probate or via an appraisal using DOD comps.

[TAXNJ]

Family

Their basis is the DOD basis on the 706 or with probate or via an appraisal using DOD comps.

Yes but as FEDUKE says "I'm getting all of this "information" second-hand. (Oh yes - the three children are also having some problems agreeing on the "correct" answer to the situation.) his latest reply seems to be the best way to handle it.

Why? FEDUKE got "information" second-hand and family fighting or not agreeing. Now, FEDUKE can be both a Mediator and a Preparer or realize this may get to be a legal issue beyond FEDUKE's scope. Just keep the billing hours running!

[FEDUKE404]

New facts to original query

It seems that Granny did NOT die, and when the home/farmland was sold the proceeds were split four ways instead of just between the three siblings.

The client is now adamant that the recent appraisal value (" According to the numerous sources we used this week they are all in agreement with that amount and every tax accountant/CPA is using it.") is the proper amount to use for the cost basis of the property that was sold during 2015.

Everything I've been able to find would indicate granny's cost (befor the three siblings arrived on the deed) would be something far different from a recent appraisal value.

By using that high value, likely very close to current market prices, it is likely that a net loss from the sale will occur. Then what? ? ? Is it investment property or personal property (I would argue the latter) ?? Could it be a "home sale"? Anything else??

For now I've just stated I will use what their attorney prepares as a statement of facts. . .and reminded them that all four persons should show the sales in essentially the same manner. (There were four Forms 1099-S issued with each showing 1/4 or the gross sales proceeds.)

What a mess. Any suggestions? ? ?

FE

[dan doshan]

It would seem that the properties basis would be quite minimal. Granny may have purchased this property long ago for very little. Also the children's percentage of ownership would have gradually increased over the years since the life estate was set up. Hard to believe there is not a fair amount of gain here for the kids.

[TAXNJ]

Yes

It seems that Granny did NOT die, and when the home/farmland was sold the proceeds were split four ways instead of just between the three siblings.

The client is now adamant that the recent appraisal value (" According to the numerous sources we used this week they are all in agreement with that amount and every tax accountant/CPA is using it.") is the proper amount to use for the cost basis of the property that was sold during 2015.

Everything I've been able to find would indicate granny's cost (befor the three siblings arrived on the deed) would be something far different from a recent appraisal value.

By using that high value, likely very close to current market prices, it is likely that a net loss from the sale will occur. Then what? ? ? Is it investment property or personal property (I would argue the latter) ?? Could it be a "home sale"? Anything else??

For now I've just stated I will use what their attorney prepares as a statement of facts. . .and reminded them that all four persons should show the sales in essentially the same manner. (There were four Forms 1099-S issued with each showing 1/4 or the gross sales proceeds.)

What a mess. Any suggestions? ? ?

FE

Yes and can get more challenging. Since you have new facts and seem to change with each post would recommend -

- getting the attorney to hire you as consultant
- update your insurance
- get final facts with attorney's direction
- then you will be able to prepare the return

Unfriendly family issues can drag this out so good luck

[FEDUKE404]

Just the facts, ma'am

Yes and can get more challenging. Since you have new facts and seem to change with each post would recommend -

- getting the attorney to hire you as consultant
- update your insurance
- get final facts with attorney's direction
- then you will be able to prepare the return

Unfriendly family issues can drag this out so good luck

I have instructed client to get statement, prepared by "that attorney," to show cost basis, date of purchase, date of sale, sales costs, and nature of any gain/loss. I have strongly suggested that all four parties involved use essentially the same information, although only one of the four is my client.

Apparently the four family members are quite content to use the "appraisal value" as the cost basis. . .including Granny!!

I tend to agree with dan doshan, namely the true cost basis is likely quite low. No one seems willing to go down that garden path, and apparently the entire group is going to use the "appraisal value" for the cost basis.

I'm still pondering ways to adequately cover my donkey on this one, leaning heavily to the "superior knowledge" expressed by the attorney who must know more facts than yours truly. . . Not expecting much results, I've requested the pertinent basis/sale information on the attorney's letterhead.

FE

[Burke]

You can inform them that since Granny did NOT die before the house was sold, there are two different tax situations here assuming she was living in the house and using it as her personal residence. Look up Life Estates; there is a IRC 7520 valuation table the IRS uses to determine the ratio of the life estate valuation that will be attributable between Granny and the other owners, depending on Granny's age. Her portion may qualify under 121. Their's will not, but the fact is the original cost basis is what you use and it will very likely be a capital gain to the 3 other owners. NATP had an excellent article on this in March, 2007. Also see www.tax-business.com/201302.html. I would suggest you print it and give it to them. And don't use FMV as basis when (you now know) it is incorrect.

[FEDUKE404]

The picture IS clearing

You can inform them that since Granny did NOT die before the house was sold, there are two different tax situations here assuming she was living in the house and using it as her personal residence. Look up Life Estates; there is a IRC 7520 valuation table the IRS uses to determine the ratio of the life estate valuation that will be attributable between Granny and the other owners, depending on Granny's age. Her portion may qualify under 121. Their's will not, but the fact is the original cost basis is what you use and it will very likely be a capital gain to the 3 other owners. NATP had an excellent article on this in March, 2007. Also see www.tax-business.com/201302.html. I would suggest you print it and give it to them. And don't use FMV as basis when (you now know) it is incorrect.

Thank you very much, Burke.

You have pretty well addressed things quite specific to this situation.

I am not preparing the tax return for Granny, who still survives and received 25% of the gross proceeds. One of the children is my client. So far as I know, there were four separate/equal Forms 1099-S issued.

Supposedly Granny became a widow in 1999 (property was likely jointly owned??), and the life estate paperwork was drawn up within a year. The appraisal was done roughly a year later.

The three children are adamant they can each can use 25% of the appraisal cost basis as their starting point. I've tried to explain things are not quite that simple. Adding to the complication is the fact "their lawyer" is affirming their position, and I'm caught in the middle. If you (somehow) start with the appraisal cost basis, the children will likely show a loss after all the dust has settled. (Total appraised value was approximately $760k and total gross sale price was approximately $600k. Anything that happened before the life estate/appraisal is apparently a closely-help family secret.) That will open a different can of wrigglers. Even though some farmland acreage is involved (a "neighbor" bought it) I think claiming a [valid] taxable loss by anyone is a stretch. As you noted, with the real facts Granny can probably exclude her own "gain" (also some adjustments to basis when she became a widow) but the three others may be facing not so pleasant a tax solution.

The linked article is superb. I will simply provide that information to them and move on to some other tax work.

March Madness can present itself in many ways, n'est-ce pas ? ?

Thanks again, as always, for your assistance in this matter!

FE