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In 1990 my mother did a quitclaim of her home in Boston to

my sister and I ...50/50...and...
In 1990 my mother did a quitclaim of her home in Boston to my sister and I ...50/50...and she retained a life estate interest in it (she gets all profits). She died 2 months ago and we are selling the home next month. I was told that we inherit the house at the stepped-up (current) value and the sale will not be taxed. I'd like a second opinion if possible.
Thanks
Jay
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Answered in 12 minutes by:
8/20/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,159
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Lev :

Hi Jay and welcome to Just Answer!
Several issues...
1. First of all - you are correct - inheritance is not a taxable income in the US.


In the US - inheritance is not taxable income and you do not need to be reported to the IRS - there is no inheritance tax in the US.


There is no any amount limit. Please see for reference IRS publication 525 page 31 left column - - http://www.irs.gov/pub/irs-pdf/p525.pdf


Gifts and inheritances. In most cases, prop­erty you receive as a gift, bequest, or inheri­tance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you.

Lev :

2.
Inherited property gets so-called stepped up basis equal to the fair market value of that property at the time the decedent passed away.
See IRS publication 551 page 9 - http://www.irs.gov/pub/irs-pdf/p551.pdf
In order to receive a stepped up basis - the property must be included into the estate for estate tax purposes - regardless if the federal estate tax return was required or not.
3.
When the property is sold - the sale transaction is reported as (sale price) - (basis).
Thus if the property is sold shortly after it was inherited - there will not be any taxable gain - and in most situations - there might be a small loss because of selling expenses.

Customer:

Just to be clear, the house didn't come as a regular inheritance. It was quitclaimed to my sister and I 20 years ago. Does that make any difference?

Customer:

Thanks

Lev :

If your mother owned the property and retained the life estate - the property is included into her estate - and considered as inherited.

Customer:

I guess I wasn't sure who 'owned ' the property after the quitclaim.

Lev :

the life estate is considered a partial ownership.

Customer:

So, does the 'partial' affect any of this?

Lev :

The key issue - if the property is included into the estate or not. If your mother owned the property and after transferring the title - she retained the life estate - the property is included into her estate - and considered as inherited.

Customer:

Thanks so much. I really appreciate the timeliness and quality of your response.

Customer:

Jay

Lev
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Here are some additional information that might be helpful.

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/26/2036
The 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.
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