How do I report life estate sell of my mother's home? She is still alive and the proceeds were all listed on the 1099 as mine.

[davismommy08]

My mother changed her deed to a life estate with only me in 2013. This past year we had to sell the home and move her into a new home. The 1099 I received only shows me as receiving the proceeds from the sell. The proceeds were used to purchase her a new home and she lived exclusively in that home prior to sell. How do I report this on my return? There was also never a gift tax return filed at the time the deed was changed because we were not aware of any need.

[TomD8]

You may wish to consult a CPA or tax professional, because your situation is a bit complicated.

When a life estate property is sold while the life tenant is still living, there is no "step-up" in the cost basis.  The capital gain is the net sale proceeds less the property's adjusted cost basis - which is the original purchase price plus any capital improvements made after purchase, such as a room addition.  (If the property had been held until after the life tenant's death, the cost basis would have been "stepped up" to its fair market value at the time of her passing.)

In your situation, your share of the capital gain as the "remainderman" is determined by IRS actuarial tables.   IRS tables determine the respective ownership interest in the property for purposes of calculating taxes, depending on the age of the Life Tenant at the time that the property is sold.  For example, if under IRS tables the Life Tenant (your Mom) is considered a fifty percent (50%) owner, then her fifty percent (50%) portion of the profit upon sale would be exempt from capital gains tax up to the $250,000.00 limit - because she lived in the property as her primary residence for at least 2 of the 5 years prior to the date of sale. However, the Remainder Owner’s fifty percent (50%) share of the profits does NOT qualify for the capital gains exclusion and would be subject to capital gains tax at applicable tax rates.  You are the "remainder owner."

[davismommy08]

How do I file this using turbo tax? Is it investment income and a gift?

[TomD8]

The sale would be reported in the Investment Income section of TT, but I again recommend you consult a tax professional re the calculation of your capital gain. And yes, there may have been gift tax implications for your Mom when the life estate was created.  I would talk to the attorney who assisted at that time.

[rmhartman85]

When a life estate is sold while the tenant and remainder man are still alive, what is the IRS form (preferably with Page # and section/paragraph) that discusses how to determine the adjusted cost basis.

For example, 2/3 of the sale went to the remainder man with 1/3 to the tenant.  The tenant will not have any capital gains given she lived there 2 of the last 5 years.  For all of the improvements over the 50-year life of the house, can the remainder man claim 100% of those or can he only account for 2/3?  What about the expenses at the time of sale?  Can the remainder man take 100% of those or can he only account for 2/3?  Clearly the idea is to have the tenant not claim anything here since they will not pay any capital gains.

THanks.

[ReneeM7122]

Your inherited home is not considered investment income.  It's an inheritance of personal property and yes, it may be considered a gift.  As mentioned in the thread, it would be very wise to consult with a CPA.  Rather than preparing your return on your own, you can ask TurboTax to complete your tax return for you.  The mechanics of filling out forms within TurboTax is answerable but your questions certainly are complex.

The following is important regarding gifts: As of 2020 there is a lifetime gift tax exclusion  $11.58 million over your (mother's) lifetime, meaning she can gift that amount to you (and anyone else) without incurring a gift tax. If the home is worth less than $11.58 million, you likely won't have to pay any gift taxes, but Form 709 for gift tax form would still need to be filed.

The gift tax applies to transfers of property from one person to another whenever the recipient doesn't pay fair market value in exchange.  Again, you would qualify for the exclusion if this is treated as a gift, but you should be aware of this form.

@davismommy08