Life Estate

[Sandrew289]

My brother and I were owners along with my mom (who retained life estate) in her home.  Mom's health required she be moved to an assisted living facility and we were forced to put the house on the market and sell it as neither of us had the ability to maintain the home.  Since my mother is still living - she received a portion of the sale proceeds based on her age.  My question is - can we gift her any additional proceeds to avoid paying capital gains on the entire amount?  I'm compiling paperwork to up the basis based on improvements made to the home - but still we will see a significant amount of the sale coming to us.  Is gifting some back to her a good idea?

[Critter-3]

Seek local professional assistance in this matter probably with a RE attorney or Elder attorney  BEFORE you sell the home  to see what legal options are open to you in your state.  

[Anonymous]

Life Tenant Is Alive: 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.

Exemption for Personal Residence: The IRS will allow a homeowner who is living in the house an exemption for tax. The exemption amount is for personal residences and is $250,00 for single and $500,000 for married owners. The exemption is available if he owner has lived in the real property for at least 2 of the last 5 years. However, only the life tenant can take advantage of the exemption, as he is the only person living in the home. The remainderman is likely to owe capital gains if the property is sold during the life tenant's lifetime.

as stated you'll need to consult with an attorney to determine who reports what. 

[rjs · Accepted solution]

From what you wrote, it sounds like you already sold the house. If so, it's too late for you and your brother to avoid paying tax on your respective shares of the gain. Making a gift to your mother will not reduce the amount of your taxable gain.

[Anonymous]

in addition, if the gift by each to mon was over $15,000 there's a gift tax return due. 

[TomD8]

Your mother may well qualify for the capital gain exclusion on her portion of the capital gain.

IRS Publication 523 states that if  she became physically or mentally unable to care for herself,  and she used the residence as her principal residence for 12 months in the 5 years preceding the sale or exchange, any time she spent living in a care facility (such as a nursing home) counts toward her 2-year residence requirement for the capital gain exclusion, so long as the facility has a license from a state or other political entity to care for people with her condition.

https://www.irs.gov/publications/p523#en_US_2019_publink10008997

You and your brother must pay capital gain tax on your portions of the capital gain.  When you calculate the capital gain, be aware that the residence does not qualify for any step-up in its cost basis, since it was sold prior to the life tenant's death.  As @rjs  stated previously, gifting all or part of your portions of the gain will have no effect on your capital gain tax obligation.