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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22642
Experience:  Taxes, Immigration, Labor Relations
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Cost basis for life estate deed sale

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My parents bought their house in 1966 for 19,000. In Feb 2008, an elder care lawyer created a "life estate deed" transferring the property to me (the son), with the intention that the house would be protected by Feb 2013 should my parents need Medicaid for nursing home care in MA. (satisfying the 5 year look back) They would continue to live in the house and be responsible for the real estate taxes, maintenance, etc. In March 2009, my father died. My mother has stayed in the house, but now we are going to sell it for 220,000, so she can move to a condo. At this point the house is not 100% mine, but the lawyer said it's 86% mine. If we sell it, my mother would have no capital gains tax as she lives in the house. I would have capital gains, but how would the cost basis be determined? One lawyer said it would be 50% using the 19,000 basis (plus any improvements that were made over the years), and 50% using the value on the date of my father's death (it was about 220,000). But the lawyer mentioned an alternative calculation since the property was purchased in 1966, where the entire basis would be calculated using the value on the date of my father's death in 2009.  My father was the one who purchased the property and paid the mortgage, as my mother wasn't working (even though both their names are XXXXX XXXXX deed and bank accounts). The lawyer said this is a special and often missed means of determining the value. Can you confirm the method? Do you have a reference from the tax code? IRC #?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to Just Answer!

1. Under IRC section 1014(b)(9) - any property that is required to be included in the value of a decedent's gross estate for estate tax purposes shall receive a stepped-up
http://www.law.cornell.edu/uscode/text/26/1014
9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent.

2. According to IRC section 2036 - the full value of the property in the retained life estate - is subject of inclusion into decedent's gross estate.
http://www.law.cornell.edu/uscode/text/26/2036The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

3. Therefore under IRC section 1014(b)(9) you should have a full stepped-up basis for the life estate deed.
I hope that helps.
Customer: replied 2 years ago.
I did read the answer and although I feel like it's completely a different language than English, the final sentence of your answer is saying that according to IRC section 1014 (b) (9), the value used to calculate the basis to compute my capital gains when we sell the house would be the value of the house upon my father's death in March of 2009? Is that what "full stepped-up basis" means in this case?
Expert:  Lev replied 2 years ago.

You asked for IRC references - that I provided with extracts - yes - the legal language is slightly different that plan English.

 

The stepped-up basis is the fair market vale of the property at the time the decedent died.

You calculate the capital gain as (selling price) - (basis)

 

If you are not comfortable reading IRC - I suggest to use URS publication which are written in relatively simple terms

Specifically for your situation - see IRS publication 551 - www.irs.gov/pub/irs-pdf/p551.pdf - see page 9:

If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following.

  1. The FMV of the property at the date of the individual's death.

  2. The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation.

  3. The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes.

  4. The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement.

In your situation item #1 is used - and that is so-called "stepped-up basis"

Let me know if you need any help.

Customer: replied 2 years ago.
Thank you that helps a lot, and related to this I have to ask: Because my mom is on the deed, and part owner, and she did NOT die, would part of the basis (50% maybe) to calculate my cap gains tax be figured using the original purchase price plus any improvements over the years, and the other 50% would be attributed to my dad (the basis being the value on the date of his death)? Before I was figuring out the whole thing based just on my dad, but my accountant said since my mom was 1/2 owner, and she did not die, we need to take that into account.
Expert:  Lev replied 2 years ago.

Under IRC section 1014(b)(9) - the part of the property included into your father's estate would have stepped-up basis.

Because Massachusetts is not a community property state - 50% of the property value would be included into your father's estate and you need to use the stepped-up basis for the 50% of the property.

So your accountant was correct.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22642
Experience: Taxes, Immigration, Labor Relations
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