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mom lives 51 yrs in home, gives it to son in ny, daughter in Nebr, keeps life estate, if the house is sold does the daughter owe income tax on proceeds, just cause she lives out of state? it was in her name 13 months and 10 days
State/Country relating to Question: New York Already Tried: Mom's atty did the transfer to the son and daughter, 1 year later has Mom sign the RE listing agreement, obviously missed (or forgot)the fact she doesn't own it anymore, now wants the daughter and son to give the house back so Mom can sell it tax free to get the money. Says the daughter will owe taxes just cause she lives out of state. I wonder if he is just trying to cover his tail? mom wants the money. Why can't they create a trust, keep the sale proceeds tax free, give mom the income (life use) and keep the prinicpal?
Yes, if the house is sold, there would be tax on the excess of the sale price less the adjusted basis of the house (basically cost). Since mom gifted it, the basis in the hands of son and daughter is the carryover basis from mom. Holding it for more than 12 months will result in the gain being taxed at long term capital gain rates (15%) rather than short term gain (i.e., ordinary rates). The better strategy would have been for mom to wait until death to give it to son/daughter. You get a step up in basis in property at death to the fair market value of the property. If the property were transferred at death, then sold at fair market value, there would have been no gain and therefore no tax. I hope this has given you the guidance you were seeking. I wish you the best of luck! If I have adequately answered your question, even though the answer might not have been the one for which you hoped, I would appreciate it if you would please click the GREEN "ACCEPT" button NOW, so that I receive credit for my work; otherwise, though you’ve made a deposit, I do not receive credit. If you need additional clarification on this question after clicking ACCEPT, please don't hesitate to click "Reply" and I will be happy to do what I can to help you further. Thanks for allowing me to be of service to you. The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.
Attorney
Attorney/Developer
but if Mom reserves the life estate and dies the kids get the step up in basis too correct? and Doesn't mom's life estate modify the tax rules and make the sale taxable to her?
If the property were to be sold during the lifetime of the Life Tenant, the Life Tenant would not get the full income tax exemption available upon the sale of a personal residence that would otherwise have been available to them if they were the sole owners of the real estate. One possible way to avoid the disallowance of the income tax exemption upon a sale of the personal residence, may be a short term rental of the property rather than a sale during lifetime if the Life Tenant no longer wishes to reside at the property for a short period of time. (However, in order to preserve the personal residency tax exemption, the Life Tenant would have to prove the property was his/her personal residence for two (2) of the last five (5) years). The rental income could be used to pay taxes, insurance, and maintenance of the property, and any excess income would be payable to the Life Tenant. If a sale were absolutely necessary during the lifetime of the Life Tenant, then the Life Tenant would get a personal tax exemption, but not the full value of their $250,000.00 per person exemption for sale of a personal residence, however, the Remainder Owner(s) would get no exemption as a sale of a personal residence. Thus, any capital gains due would likely be due from the Remainder Owner’s proportionate share of the sale proceeds. IRS tables determine the respective ownership interest in the property for purposes of calculating taxes depending on the age of the Life Tenant at the time that a property is held in the Life Estate form of ownership is sold. By example, if under IRS tables the Life Tenant is considered a fifty percent (50%) owner, then their fifty percent (50%) portion of the profit upon sale would be exempt from capital gains tax up to the $250,000.00 limit, however, the Remainder Owner’s fifty percent (50%) share of the profits would be subject to tax. In our earlier example of a $300,000.00 profit, then $150,000.00 attributable to the Remainder Owner(s) would be subject to capital gains tax. Assuming a twenty percent (20%) to thirty-three and one-third percent (33-1/3%) tax rate (state and federal combined), the tax would be between $30,000.00 and $50,000.00. While this is a substantial tax, it can be totally avoided if the property is not sold during the Life Tenant’s lifetime, during the time the life owner can claim the personal residence exemption. Additionally, while $30,000.00 to $50,000.00 is a significant tax payment, keeping the property in the form of individual ownership rather than Life Tenancy would expose the full $400,000.00 value of the property to Medicaid claims, so the risk of a possible tax payment (that may possibly be totally avoided) is generally considered to be worthwhile. In all likelihood, any risk of possible capital gain taxes would be outweighed by the potential Medicaid benefit in the event of catastrophic illness, and remember the tax could be totally avoided if a sale of the property is postponed until after the death of the last to die of the Life Tenants. A short term rental of the property during the Life Tenant’s lifetime usually makes more sense than a sale, since it is generally worth the effort to continue ownership of the property and rent it in view of the tax savings that may be achieved if a sale during Life Tenant‘s lifetime can be avoided. However, if you believe a sale of the property is very likely or imminent in the next year or so you probably should not consider a transfer of your real estate to a Life Estate as part of your Estate plan at this time. I hope this has given you the guidance you were seeking. I wish you the best of luck! If I have adequately answered your question, even though the answer might not have been the one for which you hoped, I would appreciate it if you would please click the GREEN "ACCEPT" button NOW, so that I receive credit for my work; otherwise, though you’ve made a deposit, I do not receive credit. If you need additional clarification on this question after clicking ACCEPT, please don't hesitate to click "Reply" and I will be happy to do what I can to help you further. Thanks for allowing me to be of service to you. The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.