Home sale with LIfe Estate

[tmt1]

In 2005 my Parents deeded their home to myself and brother with each having an undivided one-half interest as joint tenants in common. They reserved for each of them a Life Estate interest.

Father died in 2019 and an appraisal was done. Is this a new bases for property for all that have interest in property?

Sold home in 2020 while Mother was living and she moved to an assisted living. Based on Wisconsin Medicaid Handbook, Life Estate Percentages, Mom’s share at time of sale as life estate holder is 29.526%. Brother’s share as undivided one-half interest: 35.237% and my share as undivided one-half interest: 35.237%

Received 1099-S with total of gross sale, not my 35.237%.

Also received ALTA Settlement Statement - Seller. This form has the following DEBIT items:

Seller contribution, Prorations of property taxes, Commissions, Title Charges, Government Recording and Transfer Charges and (Additional Settlement Charges that are the actual amount paid to Mother, Brother and myself)

On Form 8949 Part II, should box F be checked because got 1099-S not 1099-B?

Question 1: Do I enter in column (d) the Gross Proceeds as reported on 1099-S or my 35.237% of that value?

Question 2: In column (e) do I enter the total base from the appraisal or my 35.237% of interest in property?

Question 3: In column (g) do I enter the amount paid to Brother and Mother plus the total amount for Prorations of property taxes, Commissions, Title Charges, Government Recording and Transfer Charges as a negative number?

Question 4: Can column (h) be a loss and be subtracted for other income on 1040?

Question 5: Should column (f) have Codes E & N?  

[KathrynG3]

Our condolences for your loss.

It would be best for you to seek a tax professional in Wisconsin, a community property state. These questions would best be answered by a tax attorney who has more access to the related documentation.

In general, there is a step up in basis to fair market value at death. This can be either the date of death or 6 months after the date of death.

Yes, Form 8949, Part II, Box F should be checked.

Question 1-5: It would be easier to have the closing company issue corrected Forms 1099-S to each. Otherwise, it is acceptable to report Form 1099-S at your percentage rate.

Regarding reporting Form 1099-S, see: Where do I enter the sale of a second home, an inherited home, or land on my 2020 taxes?

Regarding Wisconsin law and the IRS, go to Internal Revenue Bulletin: 2004-30 and click IRS Revenue Ruling 2004-71 for other rules about splitting income between spouses in Wisconsin. 

For more instructions, see:

IRS 2020 Instructions for Form 8949

IRS 2020 Instructions for Form 1099-S

You may wish to review this resource for more tax guidance about your situation: Death in the Family.

For full details, see IRS Resource: 2020 Publication 559: Survivors, Executors, and Administrators.

[tmt1]

I talked to the Title Company. They said that this is how they do it. The Settlement statement has all the facts.

I have look at the IRS information before and and didn't find it specific to answer my questions. I am looking for EXPERT ADVICE here. I understand that this is an rare event and that there is no definite answer, subject to IRS review when filed. Please give me the best guidance that you can.

[DianeW777]

It's a bit complicated so I will try to assist, however an estate tax attorney should be consulted.

A life estate is an interest in property that is created when a person making a will or trust gives another person the use of property only during the other person's lifetime. The second party is the remainderman, or person with a remainder interest who is entitled to full ownership upon the death of the life tenant.

Mother has actual cost basis, what she and your father actually paid for the house, using her share (29.526%),  and then the stepped up basis for her share at the time of death of her husband (your father).

You and your brother should use the same as your mother's cost basis because you technically have not yet inherited it since your mother is still alive.  This follows the gift tax rules for tax purposes.

The stepped up basis may have been allowed if your mother has passed away before the sale.  This is where an estate tax attorney may need to be consulted.

You were actually given a future ownership and once the family members determine they wish to sell the property, each member will be compensated based on the ownership interests. You noted each person's share in your original question.

Question 3: Sales expenses are added to the cost basis of the property. For you and your brother you will indicate this is a sale of a second home in TurboTax. 

• Seller contribution (split based on your prorated share):
  •  Prorations of property taxes, (Itemized deduction only for each of you)
  • Sales Expenses:  Commissions, Title Charges, Government Recording and Transfer Charges 

Form 8949 Instructions:

• Box F: Yes you can check this box

Question 1: Do I enter in column (d) the Gross Proceeds as reported on 1099-S or my 35.237% of that value?

• Each will record their prorated portion of the gross proceeds

Question 2: In column (e) do I enter the total base from the appraisal or my 35.237% of interest in property?

• Your share of the fair market value (FMV).  Appraisal is not always FMV so be sure it is not an inflated number.
  • IRS definition of FMV: According to the IRS, it's the price that property would sell for on the open market. This is the price that would be agreed upon between a willing buyer and a willing seller.

Question 3: Answered above.

Question 4: Can column (h) be a loss and be subtracted for other income on 1040? 

• Yes, for you and your brother if you never used it as your main home. 
• No, for your mother because it was her personal residence.

Question 5: Should column (f) have Codes E & N?  

• If the Form 1099-S is only in one name then you should use code N and E because no basis is being reported.

[tmt1]

Reply to question 1 answer: If the IRS has the full gross proceeds from sale on the 1099-S and I post my percentage in column (d) would this cause the IRS to question the lower value?

[ReneeM7122]

It depends.   If the IRS has the full gross proceeds from sale on the 1099-S and you post your percentage in column (d) it might cause the IRS to question the lower value.  This is a complex issue that would best be handled by consulting an attorney.

[tmt1]

I don't have any local tax attorneys. All I see are CPA's that can fill out the forms. What if I just completed filing my taxes with TurboTax and have the IRS tell me I am wrong and they can ask for additional information!!

[DianeW777]

That is perfectly acceptable.  Check the details and prepare your return as accurately as you can to eliminate any penalties and interest for underpayment should that be an issue.

[tmt1]

Can I upload support documents when I file electronically?

[ToddL99]

Unfortunately you cannot add an attachment to an e-filed tax return.

TurboTax doesn't provide this feature, in part because the IRS and state e-file systems would not be able to recognize them as a tax form and check their accuracy.

Depending on what you  are attaching, you may be able to efile and send the attachment separately using Form 8453.

Use Form 8453 to send any required paper forms or supporting documentation listed next to the checkboxes on Form 8453 (don’t send Form(s) W-2, W-2G, or 1099-R).

Don’t attach any form or document that isn’t shown on Form 8453 next to the checkboxes. If you are required to mail in any documentation not listed on Form 8453, you can’t file the tax

return electronically.

Your other choice is to print and file the return by mail, including the attachment and a letter/note explaining why you are sending it.