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The basis of the property is only stepped up upon death. If the life estate owner had died prior to the sale, then, due to Section 2036(a) of the Internal Revenue Code, the basis would have been adjusted to its fair market value upon the death of the life estate owner as of the date of death. BUT, since the sale occurred first, the basis would be the parents' basis plus the cost of any improvements because the transfer of the remainder interest would simply carry over the parents' basis to the donees.
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