House Basis w/Life Tenancy Agreement

[Crank]

I have a potential client who appears to be tax preparer shopping.

She purchased her mother's home about 10+ years ago for $1 and allowed the mother to remain living there. They executed a "Life Tenancy Agreement" (LTA). Dont know who paid the bills but the client didn't live in the house with her mother. In 2009 the mother passed away and they subsequently sold the property and now she wants to know what is her basis in the property.

My interpretation is that since she purchased the property for $1 it was actually a gift and the $1 is her basis. Therefor all but $1 of the proceeds from the sale of the property will be a realized gain.

She claims that she has consulted four CPAs and called the IRS twice and has received mixed answers.

She maintains that since there was a LTA in place, the property was the mother's residence and that the address was listed on the death certificate, the transaction should receive a "stepped-up" basis as of the date of death similar to if she had inherited the property. She claim's the LTA is the key to this.

I can find nothing to show that her position is valid. Does anybody know if the facts here (LTA , mother living there, address on birth cert.) support her claim?

Thanks

[Jerry W]

I have a potential client who appears to be tax preparer shopping.

She purchased her mother's home about 10+ years ago for $1 and allowed the mother to remain living there. They executed a "Life Tenancy Agreement" (LTA). Dont know who paid the bills but the client didn't live in the house with her mother. In 2009 the mother passed away and they subsequently sold the property and now she wants to know what is her basis in the property.

My interpretation is that since she purchased the property for $1 it was actually a gift and the $1 is her basis. Therefor all but $1 of the proceeds from the sale of the property will be a realized gain.

She claims that she has consulted four CPAs and called the IRS twice and has received mixed answers.

She maintains that since there was a LTA in place, the property was the mother's residence and that the address was listed on the death certificate, the transaction should receive a "stepped-up" basis as of the date of death similar to if she had inherited the property. She claim's the LTA is the key to this.

I can find nothing to show that her position is valid. Does anybody know if the facts here (LTA , mother living there, address on birth cert.) support her claim?

Thanks

Property rights are generally determined by state law. I'm not familiar with "LTA". In our state (Tennessee) when property is transferred but the transferor retains property rights (occupancy, rent etc) during his/her lifetime, the transferee has a remainder interest. IRC Section 1014 addresses this.

Hope this helps.

JerryW

[kcjenkins]

As Jerry said, it depends on the state law. But in most states, such an arrangement is not considered a 'completed sale', and the house is considered part of the parent's estate. Thus giving the child the step up in basis. [Although not in 2010, of course.] I'd advise that she discuss this with the attorney that prepared the LTA, and get his opinion, in writing, before moving forward on it.

[Crank]

Hmmm. Interesting. Thank you both for your replies.

[Lion EA]

Have client check with lawyer versed in local property law and elder care law. If this was a life estate and if mother treated it as her home, paying property tax and keeping it up, and if it became part of mother's estate, then daughter would get a step up in basis (or step down). If this was a completed gift and not part of mother's estate, then daughter's basis is her mother's basis prior to the gift plus any capital improvements daughter paid for after the gift. Send client back to the lawyer that prepared the LTA. She may be trying to avoid paying his fee and trying to get free advice, but she could lose a lot more by getting this wrong. Her question is a legal question as much as it is a tax question.