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Proceeds from the sale of an inherited house with life estate

My siblings and I inherited a house in 2007 which contained a life estate.  The life estate was voluntarily terminated in 2023 and the house was immediately sold for under market value price.  The proceeds from the sale was split between three living relatives.  Will the proceeds from the sale of the house be taxable?

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3 Replies

Proceeds from the sale of an inherited house with life estate

If you and your siblings had the remainder interest in the property then, following the life estate, you would have taken the property in fee simple absolute at the fair market value on the date of death of the life tenant.


As a result, if the house had been sold immediately following the life estate, there would likely be little, if any, gain. 


However, the facts, as you wrote them, are not at all clear, particularly the first section where you wrote that you "inherited a house in 2007 which contained a life estate" and "the life estate was voluntarily terminated in 2023". Thus, you need to elaborate and clarify the facts.

Proceeds from the sale of an inherited house with life estate

My mother passed away and my father re-married.  When my father died in 2007, his will stated that the house was to be passed on to his children; however, my step mother had a right to life estate.  In 2023; at the age of 87, my step mother decided that she could no longer live alone and maintain the house.  She decided to permenantly move in with her son.  When she made the decision to move in with her son, a second decision was made to sell the house.  In order to do that, we required permission from my step mother who had the life estate.  She had to sign off on the sell of the house and therefore relinquishing her right to a life estate.  The house was sold within two weeks of her moving out and my step mother signed off on the sale.  The proceeds from the sell of the house; however, when to the three living relatives of my father.

Proceeds from the sale of an inherited house with life estate

You need to consult with a tax professional who can review the deed and will.


However, at first blush, it appears as if the will established the value of the remainder interest on the date of your father's passing subject to a life estate. '


One issue here is whether your step mother was on title or not.


Regardless, you would need to establish the current basis which would be done by valuing the life estate using the IRS actuarial tables. 


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


The life estate would have value, of course, and the relinquishment of such would be in the nature of a gift to those holding the remainder interest.


Again, you might want to consult with a local tax professional and/or legal counsel.

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