Reporting sale of foreign property acquired through a life estate deed while life tenant (parent) still alive

[s_christy]

My parents purchased a small apartment (in Bulgaria) for $5,000 in 1976. In 1997, they put it in my name through a life estate deed. I am their only child. My dad passed away in 2021. My mom continued to live in the home until July 2022, when she moved to the USA to live with me. Before leaving, she signed a document in front of a notary in which she declared that she gave up on her rights to use and occupy the property for the remainder of her life. She is 79 years old now, and I am taking care of her. In December of 2023, we sold the apartment for $60,000, with my name as the seller (buyer not related to our family). I lived in that apartment only when I was a child, and it has never been used as a rental property. Between 2000-2004, my parents and I invested some money on improvements such as air-conditioning, kitchen and bathroom modernization, hardwood flooring, insulation of walls, storm windows, etc. Unfortunately, I don’t have the records/invoices to provide as evidence. I did not owe any tax on the sale in Bulgaria.

1) How do I report the sale of that apartment? Do I qualify for the remainder interest exclusion (buyer isn’t a related party, and I haven’t previously sold an interest in that home and have never taken any exclusion)?

2) Is this considered a long-term capital gain?

3) Which date is considered as the date acquired: the date when my parents purchased the home in 1976; the date when they put it in my name through a life estate deed in 1997, or the date in 2022 when my mom signed the document giving up on her rights to use the property for the remainder of her life?

4) What is the cost basis for me as the seller?

[DaveF1006]

To clarify, are you reporting this sale on your return or on your mother's? If yours, do you have ownership either partial or full ownership?

[s_christy]

Thanks for the reply! I am reporting the sale on my tax returns. My parents gifted their home to me in 1997. According to that document, which I think is called a deed of donation of real property with a reserved life estate, my parents should retain their rights to use and occupy the property for the remainder of their lives and I should not have the right to use the property. My dad passed away in 2021, my mom is still alive and lives with me in the US. In July 2022, she signed a document stating that she was giving up on her rights to use and occupy the property for the remainder of her life. She did that so I could sell the property. In December 2023, I sold the apartment. The sale deed states my name as the seller. My mom’s name does not appear in that document, and she was not required to sign anything, so I assume I had full ownership before the sale of the property.

[DaveF1006]

If your name is on the deed, you are the owner and you would report this on your tax return. You would report this as an investment property since you never lived in the apartment. I am not certain what you mean by the remainder interest exclusion.  if you are asking if you are eligible for the capital gains exclusion, the answer is no because you never lived in the house to claim the Section 121 Exclusion., which excludes capital gains in accordance with the ownership and use test rules.

It would be considered a long-term capital gain. The date acquired is the date when the ownership was gifted to you.  in this case, 1997. Since this property is sold for a gain, the basis for the property is the amount your parents paid for the property ($5000). You could estimate how much you spent on improvements and add this to the basis of the apartment.,

Another issue you might consider is that you may need to file a form 3520.  If your life estate became part of a foreign trust, you may have 3520 reporting requirements according to how this was structured when established. Please read this link for more information and look under the section, Who Must File. Look at sections 2 & 3 to see if this applies to you. 

Here is how to report the sale as an investment sale.

1. Go to federal
2. Wages and income
3. investment income
4. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section)
5. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
6. Since you did not receive a 1099-B, answer “no” to the 1099-B question
7. Choose type of investment you sold - select everything else
8. Some basic information:
   1. Description –  Usually the address of the property sold
   2. Sales Proceeds – Net proceeds from the sale (on 1099-S amount received for the property) Do not include closing costs here. Instead increase the basis by any allowable closing costs. Please refer to  IRS - figuring basis on property  for information about allowable closing costs.
   3. Date Sold – Date you sold the property (on 1099-S)
9. Tell us how you acquired the property - I received it as a gift
10. Next screen you will enter the date your parents bought it.
11. Complete the section.

Reach out if you have additional questions.

[s_christy]

Thank you for the clarification!