need help w/ life estate

[kathyc2]

I'm hoping members that work w/ estates can help me out as to this makes sense. Here's what I have:
- In 2011 house was gifted to children (4) with retention of a life estate. Cost basis to parents at that time was 45K.
- House was sold in Nov 2014
- Sometime between these 2 dates Mom died. At time of sale Dad was still alive and in a nursing home.
- Seller paid closing costs were 15K
- Letter from CPA of one of the siblings states that value of life estate interest when gift executed is 47% and value of remainder interest when executed is 53%
- She then takes the 60K basis (45 + 15) times 53% divided by 4 and says each kids basis is 8K

Does this make sense? That even though it was a gift they only get the 53% of both the cost basis and selling costs?

[Kram BergGold]

Here is Help

If the house was sold after the Mom died you ignore the life estate. Basis to heirs is date of death value plus improvements after date of death, minus depreciation after date of death, and minus selling expenses. If, post death no one was using the house or if it was rented then a loss is allowed and gain is taxable. If one one of the beneficiaries or a friend began using it then gain is taxable but no loss is allowed.

[kathyc2]

If the house was sold after the Mom died you ignore the life estate. Basis to heirs is date of death value plus improvements after date of death, minus depreciation after date of death, and minus selling expenses. If, post death no one was using the house or if it was rented then a loss is allowed and gain is taxable. If one one of the beneficiaries or a friend began using it then gain is taxable but no loss is allowed.

Can you explain what you mean by ignore life estate after Mom died? Are you saying kids get a step-up when Mom dies even though Dad is still alive and living in the house. I would have to check, but I believe when Dad went into nursing home it just sat empty for a few months until sold.

[TaxGuyBill]

Does this make sense? That even though it was a gift they only get the 53% of both the cost basis and selling costs?

I am DEFINITELY NOT very experienced in this, but yes, that is how I understand that it works. The "life estate" means the parents still own part of it.


I think Kram may have missed that Dad was still alive.

[Burke]

The fact that Dad was still living is a material fact in this case; he still had a life estate interest in the property. If the house was sold after Mom died, then he would have (generally) gotten a 50% step-up of FMV at her date of death. (See also rules for community property states.) So the basis does not appear to be calculated correctly for purposes of determining gain. Additionally, the life estate percentages are recalculated at his age as of the date of sale, so that does not appear to be correct either. The gain will be split between the life estate interest and the remainder interest. Only if both were deceased does it get a full step-up to FMV for the heirs. He can more than likely exclude his portion under Sect 121. The heirs cannot. It is a long-term gain to them. See attached. http://www.makiandoverom.com/articles/le.html.

[kathyc2]

The fact that Dad was still living is a material fact in this case; he still had a life estate interest in the property. If the house was sold after Mom died, then he would have gotten 50% step-up to FMV at her date of death. So the basis does not appear to be calculated correctly for purposes of determining gain. Additionally, the life estate percentages are recalculated at his age as of the date of sale, so that does not appear to be correct either. The gain will be split between the life estate interest and the remainder interest. Only if both were deceased does it get a full step-up to FMV for the heirs. He can more than likely exclude his portion under Sect 121. The heirs cannot. It is a long-term gain to them. See attached. http://www.makiandoverom.com/articles/le.html.

Thanks. I should have made it clear that I'm concerned how it affects one of the kids, not the Dad. I'm reading the link that the % is determined at time of gift and reading your post that is at time of sale?? Do you know where I would find the chart to determine the correct %? Also, is it your opinion that the closing cost portion should only be basis for the kids at the 53%?

[Burke]

Thanks. I should have made it clear that I'm concerned how it affects one of the kids, not the Dad. I'm reading the link that the % is determined at time of gift and reading your post that is at time of sale?? Do you know where I would find the chart to determine the correct %? Also, is it your opinion that the closing cost portion should only be basis for the kids at the 53%?

You use the IRC 7520 actuarial tables to determine the value of the life estate. No, you figure basis as calculated normally, i.e, purchase price + improvements, plus stepped-up basis of jointly owned property, etc. apportioned by the life estate factors. This link may make it a little clearer. http://www.tax-business.com/201302.html.

[mscash]

The cases I have seen require the gift to be complete before there is any step up in basis. It isn't complete while Dad is still looking at the grass from the green side.