Questions on cost basis for inherited property - one life estate situation and one beneficiary deed

[Satxlady]

I have questions about the tax basis on two separate property sales in 2022.

The first property is a farm.  The farm was owned by my grandfather who died in  1976.  His estate was probated in 1977.  The will states:  “To (my father), I give the farm for his lifetime and at his death to his children, Brother 1, Me and Brother 2, or the survivors of them living at his death.”  Brother 1 died in 2019 and is survived by three children.  My Father died in Jan 2022.  The farm was sold in March 2022.

What is the tax basis?  Is it a) date of my father’s death for all of us?  Or b) date of my grandfather’s death for me and Brother 2 and date of Brother 1’s death for his three children?  Or c) something else?

If we use date of my grandfather’s death for me and Brother 2, do we use the value or remainder value listed in the probate documents:

value                          $27,500

Life estate value     $16,527.50

Remainder value    $10,972.50

We each received a 1099-S for the sale of this property with the value distributed among me, brother 2, and brother 1’s children.

The second property is my father’s house which was placed in a beneficiary deed in 2002, prior to my stepmother’s death in 2002.  There are nine named beneficiaries including my two brothers and me and six stepbrothers/stepsisters.  The beneficiary deed contains the language “This deed is subject to revocation and change in the manner provided by law.” 

What is the tax basis?  Is it a) date of my father’s death for all of us?  Or b) date the Beneficiary Deed was recorded for me and Brother 2 and date of Brother 1’s death for his three children?  Or c) something else?

[Opus 17 · Accepted solution]

On the farm, you did not inherit anything until your father died. You would use the fair market value on the date your father died.

** The wording of your grandfathers will concerns me. In many states, it is not allowable for the original owner to dictate how the heir must pass the property to the next generation.  The designation that your father must distribute the property equally to his three children may be invalid. In that case, you would have to look at your father‘s will, not your grandfathers will. And if your father did not have a will, then you would have to look at the laws of intestacy in your state.  You may wish to consult with an attorney. My best guess is that each sibling inherited 1/3 of the farm at the fair market value on the date of the father‘s death.  (The 3 children of brother 1 each inherited 1/9 the property and use 1/9 the basis.)

Regarding your father‘s house, the cost basis is probably the fair market value on the date your father died (divided nine ways of course).  The beneficiary deed can probably be understood as conferring a life estate, or at least an implied life estate.  The named beneficiaries would have inherited 1/9 of the property each, except for the three children of brother 1, who would have each inherited 1/27 of the property.

Again, it would probably be very beneficial to get the situation reviewed by a CPA who understands inheritance law in your state or by a lawyer who understands tax law. A written opinion would apply to all of you, and if you split the cost, it wouldn’t be that much individually.