Life estate and cost basis for home sale

[Burke]

Client was adamant to use figures provided by sister's CPA (even sent a copy of his 2015 Form 8949 to use).
Granny is still around, and she became widow in 1999 when property became "hers." Whether there ever was/was not a valid life estate established remains murky.
FE

Doesn't matter whether a life estate was specifically established in writing, although the deed from when she gifted it to the children should have it in there. It was a life estate situation since she continued to live in the home. And how on earth can they justify using FMV from 5 years ago as a "basis" when it was deeded to them as you indicate in or around the year 2000? I think you are still at risk since you have done due diligence, know how to report it, and they still want you to circumvent the law. I doubt if your clients have discussed this with the CPA who prepared the 8949. If he knows the circumstances, then he is at risk as well. They just like the results and the big loss they are going to get ---- for years to come.

[New York Enrolled Agent]

For those of you following this saga:


Client is content with all information reported, and my behind is firmly covered.
FE

The former may be true but I'm interested in the latter conclusion. On what basis (no pun intended) is your behind firmly covered?

[FEDUKE404]

End of story

For those of you following this saga:

Client was adamant to use figures provided by sister's CPA (even sent a copy of his 2015 Form 8949 to use).

Granny is still around, and she became widow in 1999 when property became "hers." Whether there ever was/was not a valid life estate established remains murky.

Tax values for the property were available for 1999.

CPA marked the purchase date "inherited" for the sibling, and used the value from an appraisal performed roughly five years ago. (That value is higher than the 1999 tax values available for the property.) He also marked it Code "E" although the only tax document I ever saw was a Form 1099-S. The IRS might have a difficult time finding that (nonexistent?) "Form 1099-B."

CPA's return showed a $120k loss, and each owner is claiming 25% of that on their 2015 Schedule D with a $3k carryforward for a while.

Client is content with all information reported, and my behind is firmly covered. It will be interesting to see what happens to any of the four individuals involved. . .

FE

[BOB W]

Advanced planning; should have gifted ownership back to Granny. Then sold with $500,000 exclusion..................

[Burke]

Fortunately, NC is not a community property state.

Again, in the cloudy factual world of this case, it is my understanding from afar that "the appraisal" occurred numerous years after the death of the spouse, namely shortly after the life estate with the three children was first established. FE

It's a shame this was done, but it is quite commonplace. Any gain could have been mitigated greatly if Granny had simply deeded a 1% interest in the property to each of the children, retaining the life estate provisions with the right to sell. Hopefully, it may be possible to get tax valuations in the year of spouse's death from the local real estate records.

[Lion]

I might trust a lawyer to know ownership dates, who inherited what and when, life estate dates and .... But, I would not take a lawyer's word for tax attributes, such as cost basis, capital improvements, primary residence, received via gift vs. received via inheritance, etc.

[TAXNJ]

Still

Fortunately, NC is not a community property state.

Again, in the cloudy factual world of this case, it is my understanding from afar that "the appraisal" occurred numerous years after the death of the spouse, namely shortly after the life estate with the three children was first established.

FE

FEDUKE. Great return for your office. Sounds like a lot of billable hours for you!

[FEDUKE404]

Timing issue

If the grandmother and spouse lived in a community property state, wouldn't the grandmother get a full step-up basis at the time of spouse's death so the appraised value at that point in time would be the basis for all?

Fortunately, NC is not a community property state.

Again, in the cloudy factual world of this case, it is my understanding from afar that "the appraisal" occurred numerous years after the death of the spouse, namely shortly after the life estate with the three children was first established.

FE

[peggysioux]

I did say original cost basis, but the additional fact that her spouse/joint owner? predeceased her, means 1/2 got a stepped-up basis at his death which is the normal course of events in determining basis. So basis is 1/2 original cost + improvements + 1/2 stepped-up basis + improvements after that. It's current appraisal would not enter into basis calculations.

If the grandmother and spouse lived in a community property state, wouldn't the grandmother get a full step-up basis at the time of spouse's death so the appraised value at that point in time would be the basis for all?

[FEDUKE404]

Cost basis adjustment at death

I did say original cost basis, but the additional fact that her spouse/joint owner? predeceased her, means 1/2 got a stepped-up basis at his death which is the normal course of events in determining basis. So basis is 1/2 original cost + improvements + 1/2 stepped-up basis + improvements after that. It's current appraisal would not enter into basis calculations.

Thanks. I had already put that into the "awareness file."

Problem is, all I've heard is "mom and stepfather" and no one has offered that information to the mix. I have no personal knowledge of history of parent(s) ownership.

One can only hope the attorney running all of the horses around the center ring has already properly applied those relevant facts. Of course, when the only song is "Use the appraisal, Luke!" that issue with original cost basis adjustment may not seem of much relevance to them.

I've moved on to other work with understanding I will get a definitive set of numbers "soon."

Thanks again!

FE

[Burke]

I did say original cost basis, but the additional fact that her spouse/joint owner? predeceased her, means 1/2 got a stepped-up basis at his death which is the normal course of events in determining basis. So basis is 1/2 original cost + improvements + 1/2 stepped-up basis + improvements after that. It's current appraisal would not enter into basis calculations.

[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

[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]

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

[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