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.
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.
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.
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.
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.
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.
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
Basis is FMV when BOB dies and depreciation taken by BOB doesn't have to be taken into consideration.
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.
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!
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
Alternatively, To enter this transaction in TurboTax Online or Desktop, please follow these steps: TurboTax will guide you through this.
-follow this link for more information-
IRS answers on Gifts and Inheritance
Per
@RayW7
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?
Cost basis = the FMV as of the DOD of the last owner who passed
@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?
It is the Fair Market Value on the date of death of the surviving spouse.
The basis would be the fair market value on the date of death of the last life tenant.
Than you, I appreciate your response.
I'm being told by a knowledgeable friend the cost basis should be established in two increments. The first increment at the passing of the first tenant, or parent, and the second at the passing of the remaining parent. Are you aware of a situation where the cost basis would be calculated in two increments?
The first parent died 20 years earlier which effectively lowers the cost basis significantly.
Thank you,
There is no step up in basis after the first life tenant passes.
The basis of the property is stepped up to its full fair market value upon the passing of the last life tenant.
@Pfan wrote:
Are you aware of a situation where the cost basis would be calculated in two increments?
That would be applicable in the scenario, for example, where your parents owned the house as joint tenants with rights of survivorship in a non-community property (common law) state. In that case, the surviving parent would take the deceased parent's one-half at its fair market value on the date of death. The property would then typically receive a second stepped up basis (to fair market value) at the time the surviving parent passed.
I have a slight tweak to my life estate situation. A married couple established a life estate (2006), with the intention of passing the property to their 3 grown children on the death of both husband and wife. Husband passed away in 2016, and wife continued to dwell in the home. In 2021, the wife moved to assisted living and signed off on selling the home and passing the proceeds to the children equally. Do the children get any step up in basis? If so, is it only on the deceased father's half or does the step up go to the FMV of the entire home in 2016? If the step up in basis was only on the husband's half, is there any allowable way to limit the amount of the capital gain realized by the children?
The problem with this scenario is a life estate is extinguished upon the death of the life tenant, essentially leaving absolutely no interest to the estate.
Therefore, there is no step up in basis upon the death of the first life tenant to die.
No. The wife would not have a stepped up basis for half of the home when her husband died (on his date of death), because of the installation of the life estate for both her and the husband. Her cost basis would be 100% of the actual cost of the home, including improvements capital in nature that increased the value of the home. In other words, no repairs expense would ever be added to the cost basis.
When the wife went to the assisted living facility, and then the children sold the home, they would use the mothers basis at the time of sale. The difference between basis plus selling expenses and the selling price will be capital gain. The sale should go on the return of the mother if she was still the owner on the deed. This could eliminate any taxable capital gain depending on the amount of the gain and whether she is eligible for the home sale exclusion.
If she gave the proceeds of the sale to the children and if the amount per child is less than $15,000 or potentially $30,000 if for example there was a gift to the daughter and the son-in-law. Nothing would have to be filed, however if the gift was greater than the limits mentioned then the wife may be required to file a gift tax return.
The key to the answer here is based on the fact that the wife's name was not removed from the deed. Please update if you need additional clarification.
Thank you for the reminder @tagteam
@dwally See the update in paragraph 1.
[Edited: 01/20/2022 | 12:20p PST]
@DianeW777 wrote:
No. The wife would have a stepped up basis for half of the home when her husband died (on his date of death).....
There would be no stepped up basis for the wife because the wife and her spouse only had life estates; they did not own the property in fee simple absolute.
With a life estate, the interest is entirely extinguished upon the death of the life tenant and it passes either to another life tenant or to the remaindermen. In instances where there are two life tenants, a surviving life tenant does not receive a stepped up basis since that survivor only has a life estate and not a remainder.
@DianeW777 wrote:When the wife went to the assisted living facility, and then the children sold the home, they would use the mothers basis at the time of sale.
Since the wife only had a life estate and she was still alive at the time of the sale, her basis would have to be figured according to IRS actuarial tables.
My husband died on June 7. I sold our second home 3 weeks later, in a community property state. I think the "purchase price" is the value at time of death. What is the purchase date? Date of death?
You get a stepped-up basis to full fair market value as of the date of death and can use the original purchase date. The date actually does not matter since the holding period would be considered long-term, regardless.