Sale of House with Life Estate

[TKTax]

Daughter was gifted house with life estate by parents in 1993. (no gift return filed. ) One of the parents died in 2011. The other continued to live there until entering nursing home last year.  They sold house just after.

My question is: Is there a step up in basis for both mother (tenant) and daughter (remainderman), when spouse died?

Mom will owe no tax as she meets Sec 121.

I do need to figure daughter's gain. 

[Pacun]

If the house was gifted to the daughter, the death of the donor has no bearing on the property.

[Lion EA]

Unless it was an incomplete gift, a life estate. Please research, but I think when dad died, mom got 1/2 step-up. Mom is still alive, so her basis is unchanged. Mom sells house? Or, daughter sells house? Or, did daughter inherit dad's 1/2? It's late, so I'm not following the timeline!

[DANRVAN]

22 hours ago, TKTax said:

They sold house just after.

Who  received the proceeds and whose name was on the sale contract?

[TKTax]

 Finally have more info. Sale was totally in daughter's name. Medical Assistance allocated 30% to mother.  

This was a life estate in 1993, father died 2011. I am afraid that Lion is correct that mother would get step-up, but not daughter.  

I am inclined to use Medical Assistance 70/30 split.

 

 

[jklcpa]

The remainderman of a property with a life estate can sell a property before the life tenant dies if both agree and sign the transfer documents.  I think you are correct that only the mother received the stepped up basis, but I haven't researched it.

The proceeds should have been split based on the age and life expectancy of the life tenant, so you may want to actually calculate that.  With the sale entirely in the daughter's name, how were the proceeds split? Did it all go to the daughter, or was there a payout to the mother listed on the settlement sheet? (Sorry, I've not directly had a sale while the life tenant was still alive).  If not, did she use that 30% as the amount she gave to her Mother, or some other method of determining the mother's share?

Sorry that isn't much help.

[Burke]

5 hours ago, jklcpa said:

The remainderman of a property with a life estate can sell a property before the life tenant dies if both agree and sign the transfer documents.  I think you are correct that only the mother received the stepped up basis, but I haven't researched it.

 

 

You and Lion are correct.  Mother got 1/2 step up on basis at Father's death in 2011.  OP says Mother qualifies for 121; but daughter will have long-term capital gain for her share.  

[DANRVAN]

Revenue rulings and tax courts have held that there is not a completed gift while donor parent lives in house rent free and assumes rights and burdens of ownership.

As I follow the time line of this post, father died while mother was still living in house.  At that point there was not a completed gift so mother get's one half step up in basis.

Then it appears mother moves out, daughter takes legal ownership of house and sales the house in her name.

At that point, it appears gift to daughter is completed so mother's basis becomes daughter's basis.  If that is the case daughter would also get the 1/2 step up in basis.

[DANRVAN]

11 hours ago, jklcpa said:

The remainderman of a property with a life estate can sell a property before the life tenant dies if both agree and sign the transfer documents.

If mom was still living in the house when it was sold, and continued to live in the house after the sale, that would be a cut and dry a case of remainderman interest sold; such as when one child sales future interest to a sibling.

But when mom moves out I believe the question of completed gift to daughter comes into play.

[DANRVAN]

12 hours ago, TKTax said:

inclined to use Medical Assistance 70/30 split.

Agree with Judy that you need to find out how that allocation was determined.

[jklcpa]

47 minutes ago, DANRVAN said:

But when mom moves out I believe the question of completed gift to daughter comes into play.

Dan, thank you. Of course you are correct because the mother permanently moved out and gave up the life estate. 

Fwiw, for anyone else following this post, I found a good article that discusses life estate issues and when step up occurs and when it would not.  This same article was also published by NY State Society of CPAs in 2017, so I'm assuming that the attorney authored it about that same time.  The pertinent section starts at subtitle (b) "Transfer of the Residence with the Reservation of a Life Estate"  https://www.esslawfirm.com/articles/factors-to-consider-when-transfering-a-residence-for-elder-law-and-estate-planning-purposes-a-primer/

[TKTax]

Thank You All!  Discussions like this are why I love this message board.

Tim

[Sara EA]

The state will absolutely calculate the value of the remaining life estate and count it as an asset should she apply for Title 19.  The mother should have received its value on the sale.  The daughter had no right to keep all the proceeds.  There is no completed gift unless mom got no money for her interest.  The calculation of the remainder interest on sale is tricky but needs to be done or the state will do it for you, which actually sounds like it will save a lot of work!

[DANRVAN]

12 hours ago, Sara EA said:

The state will absolutely calculate the value of the remaining life estate and count it as an asset should she apply for Title 19. 

The question I have Sara is whether the position of the agency reflects the application of tax law.  

I am not familiar with title 19 process, but isn't there a five year look back period? (not that makes any difference in tax reporting)

There is no question in my mind how the gain/basis would be treated if the sale occurred after mother's death; or if one sibling sold future interest to another while mother was living in the house.

But it raises a question when house is sold while mother is alive and goes into assisted living.

There could be a case for calling it either a completed gift or claiming a sale of remainder interest.   If so, then I would look at the most favorable position for the client that can be supported.