Sale of Second Home with Life Tenancy Rights

[TANMACK]

My mother purchased a townhouse in 2000 for $100,000.  In 2005, she "sold" me the townhouse for $1.00 (which, apparently in IRS terms, is considered a gift), but on the deed she retained life tenancy rights to remain in the townhouse and continue to use as her primary residence.   Note that I have my own home so  the townhouse would be considered a second home and not my primary residence.  In 2024,  my mother moved from the townhouse to a nursing facility and I sold the townhouse for $150,000, of which I received $135,000 as the remainderman and my mother received $15,000 as her portion of life tenancy rights.   I received a 1099-S listing the $135, 000 proceeds paid to me, but my mother did not receive a 1099-S.  For tax purposes, is my cost basis the purchase price my mother originally paid for the townhouse ($100,000), resulting in a capital gain of $35,000 to be reported on Schedule D on my taxes ($135,000 - $100,000)?  And does my mother need to report the $15,000 portion of proceeds on her taxes, and, if so, on which schedule and line should it be reported (keeping in mind it has been her primary residence since 2000)?   Thank you. 

[DianeW777 · Accepted solution]

Yes, your cost basis would be what your mother paid for the house because it was a gift to you.  Since the house was yours by gift you should report the full sale price on your tax return.  The fact that part of the proceeds when to your mother as a 'gift' does not affect her tax return and doesn't reduce the proceeds from the sale for you.  

Because her gift is below the amount for filing a gift tax return in 2024 ($18,000), there is nothing to report for her $15,000.  The 1099-S should have reported the entire sale proceeds to you. Tenancy rights gave her the right to live there and provided some type of financial arrangement at the time of sale based on your comments. This does not change the reporting of the sale since you owned the property.

Report the sale using the steps below.

To enter your sale in TurboTax, follow these steps. Click this link for more information. Where do I enter Investment Sales?

1. Open or continue your return.
2. Navigate to the investment sales section:
   • TurboTax Online/Mobile: Go to investment sales. If using this application, make sure it is open
   • TurboTax Desktop: Search for investment sales and then select the Jump to link.
     • Or Personal Tab > Continue > I'll choose what I work on > Scroll to Investment Income > Select Stocks, Cryptocurrency, Mutual Funds, Bonds, Other
3. Answer Yes to the question Did you sell any of these investments in 2024? (or Okay! to Time to kickoff your investments!).
   • If you land on  the Investment sales summary or Your investments and savings screen, select Add More Sales or Add investments.

@TANMACK

[Edited: 02/18/2025 | 5:56 AM PST]

[TANMACK]

Thank you for your quick response and explanation.   Just one question on the proceeds paid to my mother ($15,000).  Your answer refers to this as a gift, but it was an amount the attorneys handling the sale of the townhouse said was due to her based on her life tenancy rights and calculated using IRS actuary tables based on her age.   The money was paid directly to her and was used to pay for her nursing facility care.   From your response, it seems I must include the $15,000 as part of the proceeds I received, though, again, it was owed and paid directly to my mother.  In effect,  I would be responsible for paying capital gains tax (on my tax return) on the $15,000 proceeds paid to her, is that correct?  Thanks once again.

[DianeW777]

Yes, you would be responsible for the gain. Although some of the money was paid to her, it doesn't change the fact that the house was yours and in your name. You are allowed to use the entire amount that your mother paid for the house as your cost basis. This reduces  your gain substantially.  You are not required to use only the $1 that was paid at the time of transfer from her to you. 

@TANMACK