Cost basis of an Inherited home with a life estate

[Pfan]

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, 

[Anonymous_]

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.

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@Pfan wrote:

Are you aware of a situation where the cost basis would be calculated in two increments? 

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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. 

[dwally]

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?   

[Anonymous_]

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.

[DianeW777]

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.

• Is the money I made from the sale of my home taxable?

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.

• Gift Tax FAQs

  IRS Publication 599

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]

[Anonymous_]

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@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).....

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@DianeW777 

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.

[Anonymous_]

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@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.

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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.

See https://www.irs.gov/retirement-plans/actuarial-tables

[judiwadley]

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?

[Anonymous_]

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.

[judiwadley]

How could it be long-term if I put his death date as the purchase date? The closing date of the sale was only 2 months after his death.

[Anonymous_]

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@judiwadley wrote:

How could it be long-term if I put his death date as the purchase date? The closing date of the sale was only 2 months after his death.

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Section 1223(9)

https://www.law.cornell.edu/uscode/text/26/1223

[judiwadley]

Oops. Sorry. Just realized you said to use the original purchase date, but the cost basis of his death. THNX!

[Anonymous_]

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@judiwadley wrote:

Oops. Sorry. Just realized you said to use the original purchase date, but the cost basis of his death. THNX!

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Correct, but the holding period for property acquired from a decedent is automatically long-term regardless of the length of time the property is held.

[judiwadley]

Just to confirm:  I DO put the date we purchased the home, but the value at his date of death. And this goes in the same section as stocks & bonds in the income area.

[Anonymous_]

That is correct.

@judiwadley