Cost basis of an Inherited home with a life estate

[John_1]

Twenty years ago my Father added my name on a Warranty Deed to convey his house that was his residents to myself and my bother as tenants in common. He also in the Deed reserved unto himself a life estate in the property for the duration of his natural life.

My Father died 5 years ago and my brothers and I sold the property in 2019
My question is for Federal Income Tax capital gains purposes when did my brother and I become the owners of the property? Was it 20 years ago when my Father put our names on the deed or when he died 5 years ago.  Also, how do I determine my cost basis in the house.

[tagteam · Accepted solution]

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Per Section 2036(a), the value of the home you and your brother inherited would have been included in your father's gross estate.

As a result, your basis in the home would be stepped up to its fair market value as of the date of death of your father.

[Anonymous]

Basis Issues

The general rule is that property is valued in a decedent’s gross estate at its fair market value as of the date of the decedent’s death. I.R.C. §1014. It is that fair market value that determines the basis of the property in the hands of the recipient of the property. That’s fairly simple to understand when the decedent owns the entire property interest at death. However, that’s not the case with property that is held under a life estate/remainder arrangement. In that situation, the remainder holder does not benefit from the property until the life tenant dies. That complicates the income tax basis computation.

Uniform basis. The general idea of uniform basis is that the cost basis of inherited property should equal the value used for estate tax purposes. The new cost basis after death is usually referred to as the “stepped-up” basis, although the new basis can be lower than the original cost. As noted above, it’s tied to the property’s fair market value as of the date of death for purposes of inclusion in the decedent’s estate. The regulations state that the basis of property acquired from a decedent is uniform in the hands of every person having an interest in the property. Treas. Reg. §1.1014-4. As explained in the regulations, under the laws governing transfers from decedents, all ownership interests relate to the death of the decedent, whether the interests are vested or contingent. That means that there is a common acquisition date and a common basis for life tenants and remainder holders.

The uniform basis rule is easy to implement after the death of the life tenant, as shown in the following example.

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Example. Boris leaves his entire estate to his son, Rocky, as a remainder holder. However, all income from the estate is payable to his wife, Natasha, until her death. The value of the property is $200,000 at the time of his death.

Natasha collects the income from the inherited property for 20 years. When she dies, the appreciated value of the property is $500,000.

When Natasha dies, Rocky becomes the sole owner of both the property and the future income. However, because Rocky's ownership of the property is based initially on his father's death, Rocky's basis is $200,000 - the value at the time his father died.

how do you determine FMV on DOD.   realtors can sometimes provide the info other times. a professional appraiser needs to be hired.  

[JSMCO]

I have a slightly different scenario.  My mom bought a house in 1991 for $30,000.  In 2003 she did a warranty deed to me with a life estate.  In 2020 a quitclaim deed was done which terminated the life estate leaving me as the sole owner and the house was sold for $150,000.  (my mom is still alive, she just moved out of the house)

What is my basis?  The original purchase price, the value at the 2003 transfer, or the value at the 2020 transfer?

How do I report this in premier?  The investments section asks for box info from a 1099-B which there isn't one for the sale of the house.

Thanks in advance.  

[DianeW777]

The cost basis, because it was a gift (not inherited after death) is the same cost basis as it was for your mother.  $30,000, plus any capital improvements after her purchase and before it was transferred to you.

You can enter your second home sale by following the instructions below.

As you go through the sale of your second home, there is a dropdown to select 'second home' (see the image below).  Also you likely did select the correct box to enter the sale after you select Stocks, Mutual Funds, Bonds, Other (1099-B), be sure you selected the 'Other' box. 

The second home sale can be entered into TurboTax CD or Desktop version by following the steps below.

1. Open your TurboTax account > Select the Personal tab then Personal Income > I'll choose what I want to work on
2. Scroll to Investment Income > Select Stocks, Mutual Funds, Bonds, Other > Start or Update
3. Add or Edit your sale that is NOT reported on a Form 1099-B > Select to enter a summary of each sale (you only have one)
4. Enter the Total Proceeds > Cost Basis (shown above)
5. Enter the holding period - if you owned the property for more than one year the it is long term, one year or less is short term
6. Continue to finish your sale.  

The gain from the sale will be fully taxable because a second home is not eligible for the home sale exclusion and it must have been your home. See the image below for assistance, the first one is for TurboTax CD/Download and the second one is for TurboTax Online. Whether you specifically select Second Home is not relevant for the tax return itself.

[Greenzoe]

Life Estate Question -Cost Basis 

A. Life Estate established by grandmother for her house.   She dies in 1991

B. Her son, BOB ,was the Life Tenant

C. Her daughter, SUE, was the Remainderman.

D. BOB lived in the house and rented the house.

E. SUE ,Remainderman, dies in 2012. In SUE 'S  will                 everything was left to her son JIM.

F.  BOB, life tenant ,dies in 2019.

G. JIM sells the house in 2020.

Questions on cost basis?

a.1991. when grandmother dies

                 or

b.2012 when SUE the Remainderman dies.

                  or

c.2019when BOB ,Life Tenant, dies.

If the  answer is b or c do we have to take into  consideration the depreciation deduction take by BOB 

Life Tenant when rented

Thanks for your help

[M-MTax]

Basis is FMV when BOB dies and depreciation taken by BOB doesn't have to be taken into consideration.

[Greenzoe]

Thanks for the reply.

Is there a place (ie web site or IRS material)that I can refer to if questions come up on how the cost basis was determined.

[tagteam]

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritan...

https://www.irs.gov/pub/irs-pdf/p559.pdf

https://www.law.cornell.edu/uscode/text/26/1014

[Jeffmcre]

Hi,

I became the sole owner through a life estate of my mother’s house when she passed away in 2020. She established the life estate in 2018. I am about to sell the house (roughly $350k), and I am wondering roughly what the tax implications will be. I will be sharing the proceeds with my siblings, and don’t want to withhold until next tax season. Thank you for any guidance! 

[Cynthiad66]

To report the sale of an inherited home, you will need to upgrade to the Premier edition.  The Form 1099-S is not entered on a tax return but the information from the form 1099-S is used in reporting the proceeds of the sale.

You will each need to report your proportion share of the gain on your individual income tax returns as the sale of a capital asset.  

Click this link for further information about reporting the sale of a capital asset

• To enter this transaction in TurboTax, log into your tax return and type "investment income (gains and losses)" in the search bar then select "jump to investment income (gains and losses)". TurboTax will guide you in entering this information (see step 6 below) 

Alternatively, To enter this transaction in TurboTax Online or Desktop, please follow these steps:  TurboTax will guide you through this.

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on” (jump to full list or show more income)
4. Scroll down the screen until to come to the section “Investment Income”
5. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section)
6. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
7. Since you did not receive a 1099-B, answer “no” to the 1099-B question
8. Choose type of investment you sold - select everything else
9. Some basic information:
   1. Description –  Usually the address of the property sold
   2. Sales Proceeds – Your proportionate share of the net proceeds from the sale (your portion of 1099-S amount received for the property)
   3. Date Sold – Date you sold the property (on 1099-S)
10. Tell us how you acquired the property - inheritance
11. Enter the date inherited
12. Enter the your fair market value - Your proportionate share of the Fair Market Value of the property at the time of inheritance plus any capital improvements since inheriting it 
13. If you had a loss, on the question of "Did you use this property for business or investment?" If the inherited house was not used for any personal use (no family member lived in it or used it between the time of inheritance and the sale), you will answer that this was for investment

-follow this link for more information-

 IRS answers on Gifts and Inheritance 

Per 
@RayW7

[Pfan]

How is the cost basis of the inherited home calculated if the life estate was set up when both parents were alive and they died 20 years apart?

[Critter-3]

Cost basis = the FMV as of the DOD of the last owner who passed

[DoninGA]

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@Pfan wrote:

How is the cost basis of the inherited home calculated if the life estate was set up when both parents were alive and they died 20 years apart?

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It is the Fair Market Value on the date of death of the surviving spouse.

[tagteam]

The basis would be the fair market value on the date of death of the last life tenant.