Gain on house

[JON]

Taxpayer's mother 10(he thinks) years ago has a sheet of paper for him to sign. Basicly her neighbor and her had gone to some senior meeting where they were told to put their homes in the kids names. Someone was there to offer the paper work for them to take home. Taxpayer did not think anything of it and signed. You guessed it she died in early 2007 at 89. Taxpayer had forgotten all about this as he did pay anything for her housing costs. She lived in it right up to the date of death. The house was in his name as he finds out when he is selling it after her death. Do we, can we, get a step up basis or is does he have Mom's basis. No gift tax returns were done when transferred. Any excedptions? No trust or lifetime anything was done.

[Matt Sova]

Deed

Was a Quit claim deed filed at all? If nothing was done with that I would say a transfer had not taken place.

[Kram BergGold]

Implied life estate

You may want to try arguing that there was an implied life estate. I have heard this is arguable.

[gbroiles]

Life estate

If the step-up is financially meaningful, I like the "implied life estate" theory; the other approach I would use in CA (I have no idea how this works in MN) would be to bring a petition in state court to rescind or void the earlier transfer on the grounds of mutual mistake.

The other approach I see is to take the position that son was holding title as trustee for Mom, not as the actual beneficial owner - it sounds like their behavior was consistent with this theory, and that son didn't necessarily believe he had the right to, say, evict his mom, sell the house, and keep the proceeds during Mom's lifetime. If the understanding between Mom and Son was that Son couldn't do anything with the house without Mom's permission during Mom's lifetime, then it sounds to me like Son wasn't really the owner of a present interest in the property.

This does have a certain "have-your-cake-and-eat-it-too" flavor to it since the participants might have taken a different view of the facts had Mom needed state-paid nursing home care and then son wanted to avoid estate recovery against Mom's house after Mom's death - probably son would not now be looking for ways to argue that he didn't really take title 10 years ago, even though that's what the paperwork says.

On the other hand, if the 10-year old deed had been a transfer to an FLP or this were a taxable estate, you can bet IRS would be in a big hurry to explain why Mom had retained incidents of ownership under 26 USC 2036(a) and hence the property was included in Mom's estate for estate tax purposes. The IRS also likes to have their cake and eat it, too.

I think you'll find some good language in the FLP cases discussing 2036(a) to justify the position that the house was effectively still within Mom's control sufficient to bring it inside her taxable estate via 2036(a), and hence Son gets a step-up by operation of 26 USC 1014. IRS has been active in arguing for an expansive view of 2036(a), which helps you in this case.

The whole thing seems like an exercise in saving people from the natural result of their own behavior, e.g., do-it-yourself tax and estate planning. If you manage to save the t/p's bacon on this, don't forget to point out gently that his mom took a big risk and generated extra stress for him as beneficiary/executor by not engaging in real planning. If this had turned out differently - if Mom had needed nursing home care shortly after the transfer, or if son had been involved in a divorce, lawsuit, or tax controversy - everyone might have been very, very sorry that Mom's house was titled in the name of Son.