house w life lease- bro buys out sisters share of inheritance early

[schirallicpa]

Mother has life lease on house. It will be part of her estate. Originally set up to have the ownership transfer at death to brother and his two sisters. Sisters were not interested in house, and he wanted to get them "out of it" now. So he paid them each their agreed upon share of $20,000 each.

Question is, is that taxable income to them. I think he has to issue each of them a 1099 for $20000 and they have to report as other income. They did not wait until it was truly inheritance, they were paid for their rights to it. Am I thinking right on this. (Obviously, I didn't like my answer.) Not sure why he was in a hurry to get them paid off, but I think the sisters were looking to get some money now.

We're finally getting some snow up here in New York!

[OldJack]

>>Mother has life lease on house. It will be part of her estate.<<

You need to establish more facts for discussion by looking for paperwork. As an example, how can mother have a life lease if she still owns the property? Then what document transfers at mothers death?

[Pacun]

13K gift and the rest taxable???

[Gail in Virginia]

13K gift and the rest taxable???

If it is a gift, then it would all be reported on a gift tax return and would only be taxable if the brother has exceeded his lifetime exclusion. But when you give something in exchange for something, it is not a gift.

It sounds like rather than a life lease, the term you want is life estate. And that would give her all the rights and responsibilities of ownership until her death when it would transfer automatically to the owners set up when the life estate was set up. And that would leave it in her estate. However, I have never heard of anyone "selling" their right to inherit. They don't really have ownership of anything until she dies, and if they should predecease her for some reason they will never have ownership of anything.

So Pacun might be right and it might be more of a gift since you can't really sell something that you don't own. I have not ever seen this, so I can't really say that I have an opinion, and I think you are going to need more than someone's opinion - you are going to need some kind of cite because I think someone is going to be unhappy no matter what you do. The question is whether it is the brother or the sisters.

Good Luck.

[schirallicpa]

The deed was set up with mothers life use, to transfer to the 3 children equally at her death. The sisters are not interested in the property, the brother is. So he paid them each $20000 for their share and change the deed so that he is the only person that the property transfers to at mothers death.

I am thinking that is a sale. I want to think that he is just gifting some money to them, but he was actually buying them out of their share of a contract. He was pursuing economic reasons, as were they.

hmmm......still thinking, and still not liking my answer............

[OldJack]

It sounds like mother deeded the property to the kids and no longer owns the property, however, retaining a right to live there. That makes the transfer with the "deed" a gift transaction from mother to the kids at her tax basis less the value of the life estate, if any value. That is assuming the gift was acknowledged and accepted. Therefore, it would appear that each child has a 1/3 tax basis of mothers basis in the property to apply to the sale price of $20,000. It is certainly an unusual transaction and one could argue several solutions.

[jainen]

>>the term you want is life estate<<

Let's not assume too much. When it comes to the implications of how title is held and transferred, it's best to stick with known facts. Life lease is a perfectly good term, although the meaning varies in states near Canada (like NY). The mother has something like a tenancy for life, and the kids have something like a remainder interest. For purposes of capital gain or loss, remainder interests are valued as a percentage of the property's FMV. The percentage is found in actuarial tables as described in Pub 1457.

The sales are capital transactions. Basis is determined in the ordinary way, whether acquired by gift or purchase.

[OldJack]

>>Let's not assume too much.<<

@Jainen

I agree, we can't really determine a solution until the deed is examined as to who owns what and tax basis for each person involved is established.

[DANRVAN]

If mom has life estate and children have remainder interest, then you would determine the basis using the tables in pub 1457 and 1459. In another application, the tables are used to calculate the value of a charitable gift of the remainder interest in a home. This method is also used to determine the value of remainder interest in bankruptcy.

An appraiser will be needed to determine the FMV on the date deed was modified to create the remainder interest to children. Then you will need to find the section 7620 interest rate to determine which pub 1457 table to apply.

You will also need the appraiser to estimate the “remaining life” and “salvage value” of the house and structures for the reduction per pub 1459.

Once you have determined the value of the future interest that was transferred, you compare that amount to the compensation received, $20,000 per 1/3 share. If the amount received was less than full and adequate consideration; the difference would be a gift, since the parties are related.