Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
basis to use to figure capital gain on sale of property
Posted by: svdanid, October 12, 2009 01:06PM
Mother gave daughter deed of gift to real property in 2007 (in Virginia) retaining life estate interest for herself. In 2008 mother died and in 2009 daughter sold property. How would basis be determined to figure capital gain or loss on sale since daughter received property as gift but mother had retained life estate. Since daughter did not have full ownership until mother died since mother had life rights, could basis be FMV at time of mother's death?

Re: basis to use to figure capital gain on sale of property
Posted by: Snargle, October 12, 2009 01:26PM
Yes, I think it could be.

Re: basis to use to figure capital gain on sale of property
Posted by: Art, October 12, 2009 02:57PM
It would be in Ohio.

Does VA law consider this to be an incomplete gift?

Re: basis to use to figure capital gain on sale of property
Posted by: Art, October 12, 2009 02:57PM
It would be in Ohio.

Does VA law consider this to be an incomplete gift?

Re: basis to use to figure capital gain on sale of property
Posted by: Art, October 12, 2009 02:57PM
It would be in Ohio.

Does VA law consider this to be an incomplete gift?

Re: basis to use to figure capital gain on sale of property
Posted by: svdanid, October 12, 2009 03:03PM
I am not sure what the law would be here in Virginia. Am hoping someone with knowledge of tax law in Virginia will answer but appreciate all of the responses being received.

Re: basis to use to figure capital gain on sale of property
Posted by: MadDog, October 12, 2009 03:16PM
I do not think state law matters with respect to the question that you posed. The property would be included in the Mother's gross estate under Section 2036. because it was included in the Mother's estate, the daughter would be entitled to a basis equal to FMV at date of Mom's death.

Re: basis to use to figure capital gain on sale of property
Posted by: svdanid, October 12, 2009 03:24PM
Thank you.

Re: basis to use to figure capital gain on sale of property
Posted by: Sven, October 12, 2009 08:07PM
I do not want to be a wet blanket, but when you die holding a life estate, there is no more life estate and the minute you die it is worth absolutely nothing. Whatever property you had disappears, unlike the ming vase or the shares of IBM. I am sure any number of accountants, real estate people, etc. can calculate the value of a life estate at any point in time based on your age and the fair market value of the property you deeded away reserving a life estate. There always has to be some value to a life estate while it is in effect, because if someone wanted to purchase your life estate rights if you got enough money you would release the rights, wouldn't you. You may want lots of money. The potential buyer will say that is too much and come back at you with what actuaries/accountants would say. Then you both comprimise and a deal is struck.

When you take all the steps needed to convey title to real estate to somebody and reserve a life estate, you no longer own the property. You have a life estate. The other person owns the real estate, and while they may not have fee simple absolute title to the property, and may have to wait years to gain possessory rights, they still own it. They have an insurable interest in it. That sure sounds like a completed gift to me. The question is what was the value of the completed gift.

So I think the basis of the property in question is not its FMV on the date of death, but is the value of the property when the deeding over was done, less the value of the retained life estate.


Re: basis to use to figure capital gain on sale of property
Posted by: MadDog, October 12, 2009 08:56PM
Sven is correct as far as state law goes. But federal estate tax law includes a transfer with a retained life estate in the transfreor's estate - the value included is the date of death value of the property subjetc to the retained right, not the value of the right (which is zero at death). Section 1014(b)(9) treats property included in the gross estate as property acquired from a decedent for basis purposes. The property owner's basis is then fair market value at date of death. So a gift was made when the life estate was established, with the gift value equal ot the value of the remainder. At death, the full value is in the estate with a credit for prior gift tax (or use of the unified credit).

Re: basis to use to figure capital gain on sale of property
Posted by: Boutwell, October 13, 2009 02:14AM
Although the title of Section 2036 refers to a "retained life estate," the actual language of the statute describes what is included in the decedent's estate. It is anything for which he (she)

>>has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—
(1) the possession or enjoyment of, or the right to the income from, the property, or
(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.<<

This is much broader than "just" life estates.

Re: basis to use to figure capital gain on sale of property
Posted by: svdanid, October 13, 2009 11:28AM
Am I correct in concluding from all the posts that to figure the capital gain or loss on the sale of the property (which was after the donor who had life rights died) one would use as the basis the FMV at time of death of the donor and not donor's cost and adjustments.

Re: basis to use to figure capital gain on sale of property
Posted by: Art, October 13, 2009 04:11PM
Correct.

There could possibly be an exception if the estate was very large and a federal estate tax return had to be filed and the executor chose to use the Alternate Valuation Date.

Re: basis to use to figure capital gain on sale of property
Posted by: Sven, October 13, 2009 04:27PM
The bottom line is the tax code seems to be very practical in dealing with these kinds of matters. It is far easier to establish the fmv of the property involved as of the date of death than do all sorts of convoluted math work to come up with what the life estate was worth at some point in time in the past. Boutwell's comment suggests to me things like unexercised powers of appointment may be covered too. I'd have to think about that one in particular, but it is not just life estates.

Re: basis to use to figure capital gain on sale of property
Posted by: svdanid, October 13, 2009 04:30PM
No, this is not any kind of large estate at all.

Re: basis to use to figure capital gain on sale of property
Posted by: Bill Brown, October 13, 2009 06:38PM
In Virginia -

"Taxable estate" means "taxable estate" as defined in Section 2051 of the United States Internal Revenue Code of 1954, as amended or renumbered, or the successor provision of the laws of the United States.
[Source: Code of Virginia, Sec. 58.1-901, Definitions]

Therefore, for Virginia estate tax purposes a retained life estate would put the subject property into mom's estate. That would make the daughter's basis be the property's fair market value on the day mom passed away.

Re: basis to use to figure capital gain on sale of property
Posted by: svdanid, October 13, 2009 06:41PM
Thanks so much for the information.



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