Thank you pk. I had also been doing some further online research and found a similar argument to what you state. Here is what I found...it sounds like I can use this clause then. Would you agree? Now I have to find out how to enter this in my tax s/w as it doesn;t allw gifts to use step up from what I see, and that's why I asked if I could enter it as inheritance to do that.
Internal Revenue Code §1014(a) allows for a STEP UP IN BASIS through making incomplete gifts.
If the home was transfetred to children while retaining a life estate: this gives the children the property with the basis being its FMV at the time of death.
Life Lease:
A life lease is a legal arrangement where an individual (the life tenant) retains the right to occupy a property for the duration of their life.
The life tenant has the right to use and enjoy the property during their lifetime, but they do not own it outright.
Upon the life tenant’s death, the property passes to another party (the remainderman), who typically receives full ownership.
Step-Up in Basis with Life Leases:
When the life tenant dies, the remainderman typically benefits from a step-up in basis for tax purposes.
This means that the remainderman takes ownership of the property at its fair market value at the time of the life tenant’s death.
By receiving a step-up in basis, the remainderman can potentially save on capital gains tax when they eventually sell the property.
Here’s how it works:
Suppose the original owner (life tenant) purchased the property many years ago, and its value has appreciated significantly.
If the remainderman were to inherit the property directly from the life tenant, their basis would be the original purchase price (which could result in substantial capital gains tax upon sale).
However, with the step-up in basis, the remainderman’s basis is reset to the fair market value at the time of the life tenant’s death. This minimizes potential capital gains tax liability.
