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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10437
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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in 1979 my father in law passed away and in his will he left

Customer Question

in 1979 my father in law passed away and in his will he left 179 acres of prime farm land to his 11 children and a life estate to his wife. The wife had total control over the land, the only thing she could not do is sell it. We received absolutely nothing from this land. She died this past year in October and we are wondering what kind of capital gains are we going to owe the government. We have heard many different stories.

Please help.

Kathy
Submitted: 3 years ago.
Category: Tax
Expert:  Lane replied 3 years ago.

Lane :

Hi Kathy,

Lane :

I sounds like you mother had what's called a "life estate" in the property

Lane :

You really need to check the actual deed that conveyed this "interest"

Lane :

BUt if that is in deed (no pun intended) what this was ... a Life estate, then the capital gains calculationg can be very complicated ... and has to do with her life expectancy (both when granted) And her gae a t death

Lane :

A life estate divides ownership inproperty in an unusual way. One person, the life tenant, has the right to live in the home for life. The other person, the "remainderman," receives full ownership after the tenant dies.

Lane :

As I mentioned, when you sell property with a life estate, the IRS divides up the capital gains based on a formula involving the age of the tenant -- based on his life expectancy, in other words. If the gain on the house is $120,000 and the formula shows the remainderman and the life tenant currently have a 50-50 interest in the home, you each have $60,000 in capital gains to report. But that happens very rarely

Lane :

Further, this MAY NOT be a life estate ... it may be simply a "right to occupy"


How does a “right to occupy” property differ from a “life estate” interest?
The person who has only the right to occupy property only has the right to live in the home.
Such person doesn’t have the right to rent the home out and receive the rent money, or to take any
crops or timber from the land. However, the person who has the right to occupy the property
doesn’t have a duty to maintain the property.
9. What terms might create a “right to occupy” rather than a life estate?
(a) the right to occupy the premises (1971 NY case: Bartholomew v. Horan)
(b) the right to “make their home” on the premises (1953 NY case: Rizzo v. Mataranglo)
(c) the right to “live in” premises (1959 NY case: In re O’Neil’s Will)

Lane :

If it is a right to occupy then the basis,will be completely stepped up to the fair market valus as of the date of death

Lane :

HOWEVER, if it was a true life estate, as mentioned above, the basis will be split between you, the children, the remaindermen and his wife

Lane :

You'r first step is to sit down with a property law attorney and make that determinaton

Lane :

26 usc sec. 2036 requires that the full fair market value of the home be included in the gross estate of the life tenant because the life estate is considered a retained interest. Because the full fair market value is included, the remaindermen get a step-up basis for the full value of the home.

There is considerable debate on the basis issue, but that is the consensus with estate planning attorneys. I usually don't file federal estate tax returns for my clients, but I do know GA's tax commission has never challenged a claim of step up basis where a life estate was involved,

Lane :

Again, your first determination is as regards XXXXX XXXXX is a life estate or a right to occupy ... If you'd like to make that determination (again based on conveyance used, typically a deed or possibly our father's will, I'd be glad to drill down further.

Lane :

Let me know,

Lane :

Lane

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, if you need more on this, please come back here, so you won't be charged for another question

Lane :

Let me know...

Lane :

Lane

Expert:  Lane replied 3 years ago.

Hi Kathy,

 

... just checking back in here... as I ever saw you come into the chat

 

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.

 

Let me know if you want to discuss this further...

 

Again, I ting your first step is to determine whether this is a life estate or a right to occupy.

 

Let me know ...

 

Lane

 

Customer: replied 3 years ago.

Lane,, it is a life estate not a right to occupy she controlled the property, received all the income from it, in the will of the father when she died the acres are passed on to her 11 children. the remaindermen, thus we qualify for the step up basis?


 

Expert:  Lane replied 3 years ago.

Hi Kathy


The general consensus among Estate planning attorneys is that if your parent retains a life estate in the property then that property passes at the death to the remainder holder. It IS includable in the deceased taxable estate, which is not a big deal as long as it is under the federal exemption amount at the time of death; $5,250,000 in 2013.

26 usc sec. 2036 requires that the full fair market value of the home be included in the gross estate of the life tenant because the life estate is considered a retained interest.

Because the full fair market value is included, the remainderman gets a step-up basis for the full value of the property.


It would only be if if the property is sold during the lifetime of both parties, (life estate holder AND remaindrmen) there may be a capital gains tax assessed against the children for their share of the gain.



Hope this helps

Lane





Expert:  Lane replied 3 years ago.

One follow-up.

Capital gains are not owed until you decide to sell the land ... (Just wanted to be we were on the same page there).

The only taxes that would be owed because of the passing of the wife herself, (and that would only be if lifetime gifts plus the value of the estate is over the $5,250,000 exemption) would be paid by the estate before it ever passes to the heirs.

Hope this has helped.

Lane

Positive feedback is appreciated, That's the only way I'll get credit for the work.

But, if you have more questions please come back here.