Capital Gains

[Justmefromstrout]

My wife's parents hold a life estate in the state of Wisconsin for two parcels of land. There is a 20 acre lot that has the house and another 40 acre lot that is just trees across the road. We would look on the property as being cumulatively one big homestead. (It is all on the same bank loan) They are on Social Security and this is their only form of income.

My wife and I are the title holders / recipients of the life estate. 

The 40 acre property was just sold for $65,000 and we found that the original decreed tax basis for the entire 40 acres was $437.50. Not per acre, total for all of it.

The deeds say that the 20 acres is homestead and the 40 acres is not.

Since they live there and it is their primary home / is all on the same bank loan, does the 40 acre lot become part of their primary residence?

If so, do they get to use some of the $240,000 Capital Gains exemption?

If not, do they have to claim Capital Gains on it? At what rate? They haven't had to file taxes in years.

Does any of this issue come to my wife and I as the recipients of the life estate or is it all on her parents at this time?

[Mike9241]

see a lawyer. there are complications. one, they do not own the land. second, the land appears to have been sold but not the residence. if the land is to qualify the residence portion must be sold within 2 years of the land sale but then they don't own either parcel so it probably doesn't matter. third, the land must be adjacent to the residence. adjacent means a common side. this land is across the street so it's probably not adjacent.

also some of the taxes on the gain are your responsibility

When the property is sold before the life tenant dies, then there is no "step-up" in basis and capital gains are paid based on the original purchase price of the property with adjustments for improvements, etc. that haven't been deducted.  The resulting capital gain is divided up between the life tenant and the remainderman based on age and life expectancy.  

[TomD8]

The sale of an adjoining vacant lot can qualify for a capital gains exclusion, but there are restrictions which are detailed in this web reference:

https://www.bza.me/?BH9Z24

This reference contains the applicable legal language (look under "Vacant Land"):

https://www.law.cornell.edu/cfr/text/26/1.121-1