Real property transfer with right of possession for mother

[schirallicpa]

I'm not a lawyer, but I play one at least once a year in my little office off main street.

I have a new client. His mother passed away recently. In 1996 paperwork was filed with the county office to convey house to my client and his sister. James is my client, Kay is his sister, Eloise is mother who died. Here's how the forms read:

"Excepting and reserving to Eloise XXX a right of possession of the above described premises for and during her natural life. It being the intent of the grantor to convey to the grantees a one-half undivided interest as tenants in common with the grantor leaving the ownership in the premises as tenants in common as follows: James xxx and Kay XXX (1/2); Eloise XXX (1/2)."

Okay - so now he and his sister have whole ownership. And now he wants to buy out his sister. First question is - what is the tax ramifications of all this.

Now - I understand capital gains and all. - I think. But, he thinks that the house didn't become his (and sis's) until mother died. And it sounds like it was half his (and sis's) 15 years ago. No money transferred in 1996.

Where do I start in calculating a cost basis?

I appreciate anyone's help. Thanks!!

[jainen]

>>reserving to Eloise XXX a right of possession<<

Assuming Eloise continued to occupy the home subject to the rights and responsibilities of an owner, it was still included in her taxable estate (even if below the exemption amount). Basis for the heirs is Fair Market Value on the date of death. (Do additional research if she died in 2010--I've already forgotten the special rules.)