Sale of home that parent lived

[rwm221]

Twenty years ago my client gave their house to my client and his 2 sisters. The 3 children made all the mortgage payments property tax etc. Their parents lived in the house for free. Parents died in 2019 ant the house was sold. My client has a 1099 s for $25,000. His sister told him to he had to file a 4797, but this was not a rental and they never took depression not expenses. My client does not even know the house value 20 years ago when they took over the house. I was going to put it is as a disposition of asset, but I don't know the initial value and if I could find it out would I divide it by 3. Thanks

[RWG1950]

Wonder if maybe each of the 3 kids got a 1099-S for $ 25K. $ 75K for a house these days does sound a little light though.
This just highlights one the problems people create by gifting the family house to the kids, likely to avoid losing it to a nursing home.
Cost basis calculation on original cost and capital improvements made over the years on an asset acquired maybe 60 years ago is a nightmare.

[Dude]

was a life estate set up 20 years ago? If so basis is todays FMV if not basis was value 20 years ago (plus improvements).

[Lion]

If a gift, basis is NOT value 20 years ago. It's parents' adjusted cost basis the day before they gifted it/their cost + their improvements to date. Unless FMV is lower. Ask questions. Does that state recognize an implied life estate, or must it be written in the deed?

[TAXNJ]

Wonder if maybe each of the 3 kids got a 1099-S for $ 25K. $ 75K for a house these days does sound a little light though.
This just highlights one the problems people create by gifting the family house to the kids, likely to avoid losing it to a nursing home.
Cost basis calculation on original cost and capital improvements made over the years on an asset acquired maybe 60 years ago is a nightmare.

What is/was the problem created here that you mentioned with gifting? Do you know if the parents had tax planning advice originally and more information is not in the Original Post?

Not all the information Is known and not even to the Original Poster. More information is needed to be gathered by the Original Poster.

[TaxGuyBill]

Because the OP said the kids were paying for the mortgage and taxes, I don't see how it could be a Life Estate.

[Lion]

Oh. Completed gift. Parent's basis before gift is children's basis. And, personal use; no loss. Long term capital gain.

[Dude]

Because the OP said the kids were paying for the mortgage and taxes, I don't see how it could be a Life Estate.

Life estate does not preclude the children from paying the mortgage, it just does not require them to

[Lion]

I thought the parents had to act like owners to have a life estate, paying bills, doing repairs & general maintenance, taking care of the house as if it were their own.

[Dude]

I thought the parents had to act like owners to have a life estate, paying bills, doing repairs & general maintenance, taking care of the house as if it were their own.

any owner has to act like an owner, that does not mean the kids are not allowed to pay the mortgage and make repairs for them.

[TaxGuyBill]

Life estate does not preclude the children from paying the mortgage, it just does not require them to

If it was legally set up as a Life Estate with all of the paperwork, you might be right (but it would be a rather uncommon scenario that the kids would pay for everything in that situation). But since the OP did not mention that, that seems unlikely. I probably should have said I think that the kid's paying mortgage interest and taxes precludes it from being an Implied Life Estate.

[Dude]

If it was legally set up as a Life Estate with all of the paperwork, you might be right (but it would be a rather uncommon scenario that the kids would pay for everything in that situation). But since the OP did not mention that, that seems unlikely. I probably should have said I think that the kid's paying mortgage interest and taxes precludes it from being an Implied Life Estate.

A vague post on a message board does not preclude the possibility of a life estate. I really wish you would give the rest of us some latitude to ask questions. We are all just trying to help rwm221

[TaxGuyBill]

A vague post on a message board does not preclude the possibility of a life estate. I really wish you would give the rest of us some latitude to ask questions. We are all just trying to help rwm221

Sorry for the misunderstanding, but my original comment was more aimed at Lion who mentioned an Implied Life Estate, which I still believe would not be the case if the kids were paying for things.

You are right that asking if there was a Life Estate is a valid question to help the OP, and my original comment was not really aimed at you (sorry, that misunderstanding is my fault). As I said in my secondary comments, it is unlikely to be the case based on what the OP has said, but you are right in asking about it.

Again, sorry for any misunderstanding.

[Burke]

I am of the opinion (and it has been held up in court) that this is a Life Estate situation since parents continued to live in the house as their personal residence. It may not have to be written as such; it can be implied and it has been discussed at length on this board in the past. As such, and due to the fact that they sold the home AFTER both parents died, it gets stepped-up basis and should not have much of a gain, if any, as long as it was sold shortly after death of the last parent. See IRC 20.2036-1(a) entire section.

[New York Enrolled Agent]

I thought the parents had to act like owners to have a life estate, paying bills, doing repairs & general maintenance, taking care of the house as if it were their own.

I think you might be thinking about the concept of "equitable ownership" where the taxpayer must assume the benefits and burdens of ownership.

IRC 2036 discusses the inclusion of the life estate in the gross estate. Benefits and burdens are not required. Possession and enjoyment are more suitable terms

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death -

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.