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My name isXXXXX am 70 and Rita is 66. I live in

Raleigh NC with my wife...
My name isXXXXX am 70 and Rita is 66. I live in Raleigh NC with my wife Rita Petelle, formally Rita Lopes. Rita is an only child of Alfred and Alice Lopes of Ludlow Mass. and everything in Alfred's will is designated to go to either Rita, our 2 daughters, Aimee and Christina and our 5 grandchildren. Alfred and Alice bought their house in Ludlow Mass. in 1956 for $16,000. Alice died in Sept. 2006. Prior to her death, she and Alfred deeded the house on April 25, 2006 in a warranty deed to Rita, Aimee and Christina for 1 dollar. The deed states the following, "Grants to Rita, Aimee and Christina as tenants in common and reserving unto themselves a life estate".

Well Alfred now lives with us in Raleigh NC and has been with us since Dec. 15th 2012. We have changed everything of his to our address including Medicare and Social Security. We are in the process of selling his house in Ludlow Mass. for $132,886. We are concerned about the tax consequences from the sale of his house as this will affect all of us. Can you please clarify what we can expect and also advise us if we should try to do something different before the sale is complete such as maybe redeeding it back to Alfred for some amount of money.

Thank You,
John Petelle
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Answered in 19 minutes by:
11/9/2013
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified

Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

Well, unfortunately, you are encountering the one negative aspect of using a Life Estate as a Medicaid and estate planning tool.

Stephen G. :

First of all, when the Life Estate was created and the transfer was made to Rita, Aimee & Christina as Tenants in Common, subject to the Life Estate, two separate interests were created in the property. At that time, a gift tax return was required to be filed which would have valued the two interests according to IRS tables based upon the life expectancies of Alfred & Alice Lopes.

Stephen G. :

There would have been no gift tax due at that time but a return would have been required to be filed.

Stephen G. :

Do you know if this was done?

Stephen G. :

Creating the Life Estate doesn't remove the property from the taxable estates of the donors, but it does serve to avoid probate when either or both of the donors die.

Stephen G. :

So, presuming for the moment that Mr. & Mrs Lopes owned the property equally either jointly or as Tenants by the Entirety, when Mrs. Lopes died, her 50% interest in the property would have been "stepped up" to 50% of the Fair Market Value of the property, as it would have been included in her taxable estate, even though no estate tax would have been due on her estate.

Customer:

Stephen,

Stephen G. :

Unfortunately, the benefit of the personal residence exclusion upon the sale of the property is not available to the surviving life tenant in the property.

Customer:

Stephen, I don't have a copy of Alfred's 2006 tax return but I don't believe anything was done related to a gift tax.return

Stephen G. :

As I'm sure you know, all parties involved, including Mr. Lopes will have to sign off on the sale of the property, with Mr. Lopes relinquishing his life estate in the property as well as the residual interests (the tenants in common) also relinquishing their respective interests in the property in order for the property to be sold.

Customer:

What does this mean in plain english as far as tax consequences? Also, if we deed it back to Alfred does this solve some problems? The closing is scheduled for Nov. 20th. Is their enough time to do something if this is to our benefit? Alfred and the rest of the family get along great, no issues so we will jointly do what is in our best interest.

Stephen G. :

Basically, there will be a tax basis adjustment necessary, in order to arrive at the correct income tax basis of the property. At the time of that the life estate were created, although gift tax returns would have been required, and they would have been based upon the fair market value of the property at the time the life estate's were created, there would have been no corresponding adjustment to the income tax basis of the property, the standard situation with lifetime gifts.

Stephen G. :

Deeding it back to Mr. Lopes won't help anything even if it were deemed to be valid income tax wise as in order to qualify for the personal residence exclusion, he would have had to both OWNED & Occupied the property for 2 out of the last 5 years ending on the date of sale. Since the life estate's were created in 2006, the ownership criteria can't be met.

Stephen G. :

You will need to determine the fair market value of the property when Mrs. Lopes died and that should result in a "step-up" in tax basis of the property equal to 50% of that value, some of which will belong on Mr. Lopes income tax return (which will probably mean zero capital gains taxes on that piece) and the rest split amount the tenants in common.

Customer:

What is the tax basis in our situation? How can I find out if Alfred and Alice did something back in 2006 when their property was deeded to our family? I would think the tax implications are different for us versus our daughters as we are retired. This past year I paid no federal taxes because of what we made. Next year with my wife collecting half of my social security $1100.00 starting in Nov. and me having to take $8000 required minimum IRA withdrawal my taxes will increase. I am concerned about the implication of the sale of the house on top of this.

Stephen G. :

As far as the other 50% is concerned (Mr. Lopes half which is also split between him and the tenants in common) would be based upon 50% of the original acquisition cost plus any improvements to the property through the date of the creation of the life estate which would again be split between him and the tenants in common.

Stephen G. :

As far as the actual numbers are concerned, I recommend that you have a local CPA do the necessary allocation for you, presuming no gift tax returns were filed at the time the residual interests were created, in order to come up with the correct splits in the tax basis between Mr. Lopes and the 3 tenants in common.

Stephen G. :

However, the botXXXXX XXXXXne is that 1/2 of the tax basis will be based upon 1/2 of the original cost of the property + any improvements through the date of the creation of the life estates & the other 1/2 will be based upon 50% of the fair market value of the property at the time of Mrs. Lopes' date of death.

Stephen G. :

It is unlikely that you will have much if anything in the way of capital gains taxes to pay if the sale of the property is going to take place on November 20th. The reason being is that to the extent that you are in the 15% or lower tax bracket, the capital gains rate is zero.

Stephen G. :

Clearly Mr. Lopes' rate will be zero, so that leaves the two daughters whom I presume are not in the 15% or lower tax brackets, but probably much higher?

Stephen G. :

The five grandchildren have nothing to do with it.

Customer:

How should I determine the fair market value of the property when Alice died? Also, since Alfred is living with us I might claim him as my dependent versus having me file for him. By the way he has been diagnosed with Alzheimers

Stephen G. :

Basically, you would need to obtain an appraisal of the property at that time, which can be done now of course; however, given the relative low amount of value and tax that you are talking about, one method that I have used in similar situations when obtaining an appraisal or even a written opinion of value is not easily done (for one reason or another), is to determine the current assessed value for purposes of the real estate tax and figure out what percentage of value that is to your GROSS sales price, and then apply that ratio to the real estate tax assessment as of the date of death (in your case in 9/2006); the real estate assessment back in 2006 would be readily available from the local Board of Assessors or even the Tax Collector in Ludlow.

Stephen G. :

How old is Mr. Lopes?

Stephen G. :

When is your birthday & do you have to make the $8,000. withdrawal in 2013 or 2014?

Customer:

One of the documents I need to give to the lawyer covering the sale of his house is a certificate for no information reporting (1099-s) form. There are 6 questions on this form for Rita, Aimee and Christina to answer. The first question I believed you answered says " I owned and used the residence as my principal residence for periods aggregating 2 years or more during the 5 year period ending on the date of the sale or exchange of the residence". All three need to answer false. The rest all all true except question 6 which I don't' understand. It states "If my basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which section 1031 of the IRS code appled the exchange to which section 1031 applied occurred more than 5 years prior to the date I sold or exchanged residence" Is this true or false?

Stephen G. :

I'm going to leave you a link to an excellent article on Life Estate's that explains some of this in greater detail as well as other aspects of how the rules on Life Estate's are applied.

Stephen G. :

http://www.berkshireelderlaw.com/userPage_56_Life-Estate-Ownership.htm

Stephen G. :

Just a minute re your question

Customer:

Alfred is 89 and I am 70, birthday 2/2/43 . I already made the withdrawal. Is it possible to get a copy of this discussion?

Stephen G. :

You will need to receive Form 1099s on the transaction.

Stephen G. :

Recheck your wording on the last question number 6

Stephen G. :

There was no 1031 exchange involved ever on the property.

Stephen G. :

The questions starts with "If" - so there's no 1031 so there's no "IF about it"

Stephen G. :

Besides, once you answer #1 as False, the rest of the questions don't matter.

Stephen G. :

Has Mr. Lopes already relinquished his Life Estate & the attorney plans on recording it at the closing?

Customer:

Given this discussion so far where do you see me so far as far as the sale of Alfred's house. With our gross income for 2013 being about $50,000 before the sale of Alfred's home what can I expect if Rita and I receive about $40,000 from the sale of his house as far as a tax implication. This statement is on the form the 4 of them have to sign. There is a reference Pursuant to IRS Rev Proc 2007-12. There is a N/A for question 6. I guess I should check this.

Stephen G. :

Ok, re #6, that's what I meant when I said T or F didn't fit; ie no 1031 involved

Customer:

Great, so answer false for all 4 of them solves this question. how about my tax question and the question about a copy of this dialog?

Stephen G. :

Does the 50K include your social security?

Customer:

yes it does

Stephen G. :

As far as a copy goes, you just need to highlight the conversation and then depending upon your browser hit "Control P" to print it; or once we are done & you provide my rating, the question goes into a Question/Answer format & you can come back anytime you want & access it.

Stephen G. :

So you'll have around 26K of S.S. & your wife will have a little over 2K so about 28K plus 8K retirement distribution; that's 36K what's the rest consist of?

Stephen G. :

Do you itemize or use the standard deduction?

Customer:

I have a $20k pension plus $20k social security. This year I have $8k dist. and Rita starts collecting her SS. $2k for nov. and dec. for $50K plus some interest. We don't itemize.

Stephen G. :

OK, give me a minute

Stephen G. :

Let's say the house was worth 100K in Sept 2006; so that's 50K say plus 10K 1/2 of org cost + impvs = 60K/3 = 20K so 40K - 20K = 20K LTG

Stephen G. :

So, as far as SS is concerned; rough #s 20K pen + 8K dis = 28K + 20k LTG + 1/2 SS =11K

Customer:

Can you net this out for me. If we proceed with the sale as is , each of us getting around $40,000 how will the $40k affect our 2013 tax situation? At tax time what do we need to concern ourselves with as far as documents and forms for the IRS. I guess the town of Ludlow can tell me what the house was worth in Sept. 2006.

Stephen G. :

I'm working on it, unfortunately it isn't that simple

Stephen G. :

59 - 20 = 39 minus standard over 65, + exemptions = 25k + - =- 14K

Stephen G. :

Federal tax will approx $1,500 - $2,000. no tax on capital gain as you are in the 10% - 15% tax bracket

Customer:

It appears the paid in full consideration of $1.00 on the warranty deed has no affect on anything related to the sale/tax of Alfred's home. Is that correct

Stephen G. :

No. Nominal consideration for family transfer purposes.

Stephen G. :

You will file a Schedule D and it's subschedule with your 1040 for 2013

Stephen G. :

You don't file any additional documentation with your return.

Customer:

We are almost done. Please explain the 59-20 =39 minus standard over 65 line item

Stephen G. :

However, it would be smart to have a CPA prepare your return this year if you aren't familiar with these type transactions.

Stephen G. :

minus the 20 in the estimate LTG that's isn't taxed along with your ordinary income

Customer:

How about my daughters. What will they need at tax time and what will they be exposed to?

Stephen G. :

It is taxed separately, except in your case the tax is zero based upon the tax bracket you are in.

Stephen G. :

I have no idea about your daughters as I don't know what their income is.

Stephen G. :

I can't figure that out with doing pro-forma tax returns for them; that's beyond the scope of what we can do here;

Customer:

Their incomes are much higher but I am interested in the forms they need to be concerned with.

Stephen G. :

Same forms you would use depending upon their situations they may need Alternate Minimum Tax, etc. Are they married?

Stephen G. :

I'll leave you my contact information in case you want to reach me here again.

Stephen G. :

If you want to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used by the site as an additional tool to rate our performance;

Please remember to rate my response; it is the only way we get credit for our work.

Customer:

Thanks for all your support. I believe you answered all the questions I currently have

Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified
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