Basis of Inherited Property (with a twist or two)

[Unregistered]

(a) A married man purchases real estate in his own name only in 1940 for $4,000.
(b) He wills it to his daughter, leaving a life estate to his wife.
(c) He dies in 1989 (wife still living), when real estate has a fair market value of $100,000.
(d) Wife gifts her interest in the property to the daughter in 2001.

Question: What is the daughter's basis in the property when she sells it (for, say, $300,000) in 2006?

[Bees Knees]

Under the Uniformity of Basis rules of Regulation Section 1.1014-4, the basis is the fair market value of the property as of the date the property was acquired from the decedent. The life estate interest that is later gifted to the heir cannot add to that date of death FMV basis. Thus, the daughter’s basis remains at $100,000 and is not affected by the later transfer of the life estate interest.

[Unregistered]

Basis of Inherited Property (with a twist or two)

Should part of the fair market value of the property at time of death be allocated to the life
estate of the wife and the rest to the daughter as her basis?

[Bees Knees]

There would be no reason to do that under the facts you presented. The wife has no need in basis. She did not try to depreciate or sell anything. She just simply gave away her interest.

It is interesting, however, that the regulations do talk about any depreciation claimed on the partial interest as having an affect on the basis of the remainder interest.

For example, if for some reason the wife could have taken a depreciation deduction on her interest, that would reduce overall basis when the daughter eventually owns the whole interest outright.

That's just in theory, however, and probably not a good example for this situation, since I can't imagine any scenario where a life estate interest in property could qualify for depreciation.

[Unregistered]

Basis of Inherited Property (with a twist or two)

Sounds good. Thanks so much for your help.

[jainen]

If she decided

>>I can't imagine any scenario where a life estate interest in property could qualify for depreciation<<

If she decided to move someplace else like a smaller apartment or a nursing home, she would be entitled to all the rental income and the property would have normal depreciation.

[Bees Knees]

If she decided to move someplace else like a smaller apartment or a nursing home, she would be entitled to all the rental income and the property would have normal depreciation.

I wasn't sure whether that could be done or not.

So I looked it up.

Jainen is correct. Code Section 167(d) says a life tenant with the remainder going to another person can deduct depreciation as if the life tenant were the absolute owner of the property.

Learned something new today.

[Unregistered]

I don't necessarily disagree with the discussions here but I'd like to ask a question. Is "life estate" the correct terminology to use in the original scenario? Under §2036, a "life estate" requires in part that a decedent must have transferred the property during his/her life. I grant you that mom is still alive but since she never had any incidents of ownership in the property, can we call her right to live there a life estate?

In the law, I think there is a right of homestead which allows only a right of occupancy and use of the land. It seems that Dad left mom a right to homestead in the residence. If that's the case, then mom has no interest in the property & thus she can not make a gift to her daughter of something in which she has no ownership rights.

Perhaps, I'm misreading or making an unwarranted jump based on §2036 but I thought I'd at least ask the question. Would welcome any thoughts others may have.

New York Enrolled Agent

[Unregistered]

life estate

Some infor on Life Estate

A life estate, at common law is an estate in real property that ends at death. Although it is technically a tenancy (the holder is called a life tenant), it is treated the same as a fee simple with respect to the constraints upon its use for the duration of the estate.

Since it ends at death, and the owner of the life estate cannot leave it to his heirs or convey a larger interest in the land than what the owner actually owns, a life estate is not an estate of inheritance. Life estates are measured either by the life of the owner of the estate, or by the life of some other person; these latter are called life estates pur autre vie, Law French for "during someone else's life." A life estate pur autre vie is most commonly created in one of two circumstances.

First, when the owner of property conveys his interest in that property to another person, for the life of a third person. For example if Joey conveys Blackacre to Rachel during the life of Monica, then Rachel owns the land for as long as Monica lives; if Rachel dies before Monica, Rachel's heirs will inherit the land, and will continue to own it for as long as Monica lives.
Second, if Joey conveys Blackacre to Monica for life, Monica can then sell the life estate to Rachel. Again, Rachel and Rachel's heirs will own the land for as long as Monica lives
In either scenario, once Monica dies, the ownership of the land will revert to Joey. If Joey has died, ownership will revert to Joey's heirs. The right to succeed to ownership of the property upon the expiration of the life estate is called a remainder.
The early common law did not recognize a life estate in personal property, but such interests were cognizable in equity. Thus, although life estates in real estate are still created today, the life estate is more commonly used in trust instruments, typically in an attempt to minimize the effect of the inheritance tax or other taxes on transfers of wealth.

The law of England and Wales no longer recognises the life estate at law in relation to land, instead the holder of legal title to the land (whether the freehold fee simple or a lease) will hold that land on trust first for the life tenant and then for the remainderman.

[jainen]

It is true

It is true that the mother does not have an ownership interest. A life estate is a tenancy, but that is still an interest that can be sold or given away. (All she can sell is the right to use the property during her own lifetime, not full title.) She has full rights to the property whether she lives there or rents it. The only thing she can't do is blow it up or transfer it in a way that damages the remainder interest.

A life estate can be created in any number of ways, including bequest.

[DonPriebe]

Value of life estate is moot

Note that in the original question the actual value of the life estate is moot. At the father's death the mother inherited a life estate with a FMV of "x". The daughter inherited the remainder of the property with a FMV of "$100K - x" She later is gifted the life estate at its basis of "x", so her total basis is now $100K.

[Bees Knees]

True, but we like to carry issues on this message board out to the nth degree. We like to add to the story...such as what if the mother decided to move out and collect rental income. What would be her basis in her life estate for depreciation purposes? The code says she can do it, and the regs say that if she does, the daughter's remainder interest basis must be reduced by depreciation.

[jainen]

Bed &amp; Breakfast

>>we like to carry issues on this message board out to the nth degree<<

Suppose the mother turned the home into a Bed & Breakfast. Would the goodwill get a stepped-up basis when she dies, or is that included in the existing property value?

[JG EA]

nth

I've heard that if children get any income/use from the life estate personally, they'll have to pay monthly payments to a care facility up to the value they received during the last 5 years before the parent goes into a care facility.

[jainen]

nth

>>value they received during the last 5 years of the parent's life<<

Don't you mean the nth years? Because, how do you know? (Maybe the nursing home has a plan for when the money runs out.)