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The remainder of this post is based on the law as it currently stands. The gift and estate law is very likely to change, possibly substantially, within a couple of months and there is no way to predict how those changes could affect the answer to your question. There is a likelihood that the "step up" rules that currently exist will go away.
I am not sure why you would want to give a life estate in property that you own to your parents - I think it would be easier just to allow them to live there.
Nonetheless, this transaction is not likely to result in a step up in basis at the time of your parents' death. The step up provisions apply, generally, to property that someone owns and then gives but reserves a life estate. This is different than someone owning property and granting a non-owner a life estate. I have not encountered this situation in practice and cannot find any case law dealing with this issue.
Logically (although tax law is not necessarily logical), I would expect that your basis will be what you paid. To the extent that you include the value of a given life estate on a gift tax return, your initial cost would be reduced by the value of the life estate and then that value wold be added back at the time of your parents' death. I cannot point you to any citation that states this as fact - it is my best "guess" based on how the code and regs are applied in other circumstances.
Thanks Jon. The reason for granting them a life estate rather than just letting them live there is that in Florida, the life estate gives my parent's "homestead" status and with homestead status, the annual ad valorem property taxes on the property are about $2,500 per year less and annual increase in property taxes is capped at 3%.
Your answer sounds reasonable to me. This is my first time actually using this site - how do I tell them to release funds to you?
That is certainly a sensible reason to gift the life estate.
You can release the funds by clicking the "accept" button.
Let me know if you have additional questions.