Life Estate and Taxes

[ghegewald]

My mom passed in 2008 granting a life estate to her second husband at the time (not my father who was her first marriage).  The house (Washington State) was deeded to myself and my siblings.  My step father just passed after 18 years in residence.  We are going to sell the house quickly.  My question is in regards to taxes.  I thought the house would step up in basis to value at time of my mom's death.  If we sell now, the capital gains taxes would be based on difference in today's value and 2008 value (FMV).  It does seem strange that we would have to pay capital gains on an asset we did not control nor could get income on for the past 18 years.  So my questions are as follows:

1)  Is the capital gains based on 2008 FMV or possibly on Life Tennant passing since we did not have control of asset?

2)  If it is based on 2008 FMV, what is the best way to determine that value.  I have the property tax estimate as well as a real estate comp. that I had completed in 2008.  What is typically best method?

Thanks

Glenn

[M-MTax]

The step up in basis (for the remaindermen) occurs on the date of passing of the last life tenant (I am assuming that your stepfather had a life estate).

Question: Was the property actually titled in you and your siblings' names in 2008 when your mom passed? Thereafter, did you and your siblings allow your stepfather to live in the house until his passing (whether as a rental or just gratis)? If so, then your basis would be the FMV in 2008 on the date your mom passed. If that's the case, you could get a licensed appraiser to do a retroactive appraisal. 

[ghegewald]

Thanks, but can you clarify?  My mom granted her husband the right to live in the house until his death.  This was spelled out in her will.  My mom died in 2008.  Her husband, was granted the right to live in the house (outlined in her will) until his death (he just passed).  The house was deeded to me and my siblings in 2008, but  myself and my siblings (I believe in this case we are considered the remaindermen?) just received possession of the house on his passing.  So are you saying FMV will be based on todays value (2026) based on the life tenant just passing?

[ghegewald]

I just noticed your questions.  We were on the deed and shown as owners for property taxes, but based on the will he (my Mom's husband) was allowed to live for his life in the house.  He maintained control and we could not sell or restrict his usage of the house.

[M-MTax]

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@ghegewald wrote:

So are you saying FMV will be based on todays value (2026) based on the life tenant just passing?

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Yes, that is precisely what I am saying since your stepfather was granted a life estate. You and your siblings had a remainder interest, not full ownership and control, as a result of the provision in the will. 

Frankly, I think you should have a local attorney at least look over the will to ensure the foregoing is actually the case. You and your siblings did not technically have possession if a life tenant was occupying the house under a valid provision in the will granting a life estate.

[ghegewald]

It was declared a life estate at the time and we did not have full control.  So you are saying FMV is based on his date of death.  That is how I read your response.  So FMV is essentially 2026 for capital gains.

Furthermore, if the house is sold quickly withing several months of his passing, would not the sale dictate FMV and as a result there would essentially be zero (0) capital gains taxes?

[M-MTax]

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@ghegewald wrote:

So you are saying FMV is based on his date of death.....So FMV is essentially 2026 for capital gains.

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Yes, your basis would be the FMV in 2026 on the date of his passing.

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@ghegewald wrote:

....if the house is sold quickly withing several months of his passing, would not the sale dictate FMV and as a result there would essentially be zero (0) capital gains taxes?

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Yes, a good indication of FMV would be the price an unrelated third-party paid for the property (without undue influence) after exposure to the market. An appraisal by a licensed appraiser is always the best course of action but a quick sale to an unrelated party should be sufficient in almost all cases.

[ghegewald]

Thank you!  Very helpful.  Best wishes.