Life Estate

[mrichman333]

So, I'm familiar with inheritances, living trust etc. But this is my first time dealing with a life estate.

T/P parent put property into a life estate, he had/has three older kids.  One child paid the other two for their interest in the property.

My T/P is one who got paid for his interest in the property

Would this be a gift and what would the cost be calculated as if it was a gift or is this something else? 

Thanks

[Max W]

Life estates work best when they terminate on the last parent's death.

When they don't, you will run into some complications.

The following, gives a pretty good explanation, with examples, of a life estate, sold prior to TP's death.

Note - Link is invalid. I've sent a PM asking Max W to follow up with the link or to provide it so that this post can be edited with it included.

Edited October 7, 2015 by jklcpa
note re: invalid link

[mcb39]

Am waiting for the link to be fixed.  I have been researching this very question for over a week.  However, in my case, the entire house was sold; so Mom is one of the four who get a share.  Yes, it is definitely a gift and basis is whatever Mom's basis was when she acquired the property.  There are possibly some obscure calculations to be done.  Also, if sold at a loss; no capital loss can be taken.

[jklcpa]

No info on the link yet.  I'm sorry, I'd help directly if I could but I've only had a handful of these and don't feel comfortable giving advice.  

[SaraEA]

mrichman, you have a calculation nightmare on your hands.  I can give you some insights into the basics, but the devil will be in the details.  When the parent turned the home over to the siblings and retained a life estate, a gift tax return should have been filed.  If you can get your hands on it, you're halfway there.  Basically, the parent's basis in the home and its FMV enter into the equation.  The value of the share of the basis s/he retained is calculated using actuarial tables the IRS publishes.  Essentially you look up his or her birthdate and use the factor in the table to calculate the part she retained.  The remainder is split between the three siblings.  Your client's basis is that number, and gain or loss is calculated from there.  A loss will probably not be allowed because your client's share was sold to a related party.

There is a catch when it comes to gifted property.  If the FMV at the time of the gift is less than the donor's basis, gain or loss is figured differently.  Good luck!

[Max W]

here is the link again. just tried it and it worked fine

http://www.susanmooney.com/?page_id=530

[DANRVAN]

See Reg 1.1014-5(a):

(2) Except as provided in paragraph (b) of this section, the proper measure of gain or loss resulting from a sale or other disposition of an interest in property acquired from a decedent is so much of the increase or decrease in the value of the entire property as is reflected in such sale or other disposition. Hence, in ascertaining the basis of a life interest, remainder interest, or other interest which is sold or otherwise disposed of, the uniform basis rule contemplates that proper adjustments will be made to reflect the change in relative value of the interests on account of the passage of time.

(3) The factors set forth in the tables contained in §20.2031-7 or, for certain prior periods, §20.2031-7A, of Part 20 of this chapter (Estate Tax Regulations) shall be used in the manner provided therein in determining the basis of the life interest, the remainder interest, or the term certain interest in the property on the date such interest is sold. The basis of the life interest, the remainder interest, or the term certain interest is computed by multiplying the uniform basis (adjusted to the time of the sale) by the appropriate factor. In the case of the sale of a life interest or a remainder interest, the factor used is the factor (adjusted where appropriate) which appears in the life interest or the remainder interest column of the table opposite the age (on the date of the sale) of the person at whose death the life interest will terminate. In the case of the sale of a term certain interest, the factor used is the factor (adjusted where appropriate) which appears in the term certain column of the table opposite the number of years remaining (on the date of sale) before the term certain interest will terminate