Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: B L, September 14, 2011 01:32PM
My sister and I own a home in which my mother 96 1/2 yrs. old has a life time estate. She now needs to live with one of us and we need to sell the house with her permission. What part of the sale will count as income for her? I've been told there is a chart with the percentage of the sale that the Life-Time Estate holder should receive based on their age, but I don't know where to find information on this.

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: Drewremedy, September 14, 2011 02:30PM

There is such a table --but I'm not sure that's the right place to begin thinking.

And in a down market there may not be much/any gain ?

I thought that if Mom sells her life right as part of any sale that she remains entitled to the exemption of any gain up to 250,000 if it otherwise qualifies as her residence under the 2 out of 5 year rules etc.

You and your sister might be subject to capital gains if your portion of the sale exceeds your basis--but I'm unclear at what point in time your basis was computed.

And for that matter you and Sis could buy Moms life estate out at above its residual value if needed to make the situation work out better.

PS if moms mental ability is failing you might want to sort out with counsel locking in a transfer of her rights sooner rather than later--an outside buyer and his title firm might get very nervous if Mom lacked apparent mental ability to consent to a sale.

PS there are some draconian lookback issues as to any assets mom may have if for some reason one of you is not up to the task of caring for Mom and she needs Medicaid (not medicare) So even if Mom gets say $40,000 from the sale --she may want to dissipate same in a proper manner quickly if she needs to be positioned to qualify for Medicare just in case.

( Issues did not fit the formulas perfectly as to my MIL who recently passed at 99----and bills of $ 8000 a month -month after month can sure make a hole in family pot ....so don't underestimate possible problems a few steps down the road.)

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: Sven, September 14, 2011 06:50PM
When did Mom sell you guys the house? I thought you had to "own" a house for two of the past five years to qualify for any exclusion of gain. I would be surprised if the IRS views a life estate as the equivalent of fee simple absolute ownership of a house for purposes of the exemption. Anybody know?

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: B L, September 14, 2011 07:50PM
Mother bought the home in 1995. Later in 1995, She deeded a 2 1/2 percent interest each to my sister and to me (total of 5% ownership for us). In 2002, she deed the balance of the home to us--47 1/2% each plus the 2 1/2 percent that we each already owned--Totals 100%.
She reserved a life-time estate at the time of the 2002 change.


Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: LJM, September 14, 2011 08:27PM
I was always under the impression that in this type of situation, the property was an "incomplete gift" and the entire gain belonged to the mother. After some research, it appears that I am WRONG.

The answer apparently depends on state law.

The following article from the NY Law Journal contains an example of the situation posted in this thread:
See [www.davidowlaw.com]

The following (off topic) thread from this forum discusses the sale after the death of the life estate holder:
[fairmark.com]

Lewis

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: Sven, September 14, 2011 09:09PM
Very useful post, LJM. There are all sorts of split interest in real estate that can co-exist with each other at the same time and it sure looks like the IRS recognizes there can be multiple ownership interest. How they value those interests is another story. Also, the law article is spot on and people ought to think long and hard before they do these family deals.

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: Drewremedy, September 14, 2011 10:34PM
The incomplete gift issue arises if Mom passes while still holding the home via life estate and she has not parted with control
Kids get a stepped up basis as of date of death--not always an intended problem for larger estates but useful for smaller ones--but not the nature of original question.

I am pretty sure there is a wrinkle which allows the life estate holder to sell her share tax free to extent she otherwise qualifies under 2 out of 5 residence rule and even sell it for a premium --but I cannot easily retrace my steps---

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: B L, September 18, 2011 03:03AM
Thanks for all replies. The property state is North Carolina.
I would appreciate additional information on the incomplete gift issue. Thanks LEWIS for the references. I read them. I had not realized just how complicated this can get. It seemed to sister and me that selling the house ($100,000 to $175,000) would be the thing to do, but if it makes the whole tax situation a tangle maybe we should wait. We really don't like the idea of renting or leasing the house, but maybe that's what we will need to do. Mother still is competent to make decisions at this point. Her estate will be very small--mainly the house.Thanks to each of you who responded.

Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: Drewremedy, September 21, 2011 04:29PM
Just because it takes a bit of homework is NOT a good excuse to punt or create a white elephant or even a looser rental.

I'm not a lawyer or serious tax expert---but under prior law Sec 121 the life estate holder was entitled to the full gain exemption up to $125,000 and I'm pretty sure that same concept is carried over under post 1997 law --the life estate holder gets full exemption if they otherwise qualify home as personal residence for 2 out of last 5 years etc.

To the kids who got remainderman's share of home, their basis is Moms old original cost basis which may be a function of original cost and any step up that occurred when husband passed as to his 1/2.


So for a home selling in 100-200K range it seems unlikely Mom would see any tax liability to sell her interest.
And the two remaindermen might see a very modest capital gain if values went up over the gift basis --and even than if they have losses in portfolio it might be time to clean some of those out .

And for that matter if actuary tables assign 11% of value to Mom that need not be the final answer ---if mom is a bit hesitant about leaving and you all agree she is to get 25% of proceeds --her share may still be tax free and your shares exposure to taxes goes down.

I assure you that unless you have a strong stomach you do not want to be a residential landlord and with your luck, Mom may live to 107....





Re: IRS Rules re Sale of Residence w/Lifetime Estate
Posted by: B L, August 4, 2017 10:50PM

She actually lived to be 99 and 11 months:)



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