Life estate and cost basis for home sale

[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.

[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

[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!

[Lion]

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

[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

[TAXNJ]

Ok

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

[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]

?

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.

[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]

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.)

[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