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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 322
Experience:  Tax Accountant at Praxair, Inc.
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This is my situation. (1) My parents bought a home in 1998

Customer Question

This is my situation.
(1) My parents bought a home in 1998 for $130K.
(2) Between 1998-2004 they spent $170K on improvements.
(3) In 2004 my mom passed away and the house was valued (FMV) at $500K.
(4) In 2005 my father and I entered into a life estate.
(5) from 2005-2015 I spent $100K on additional home improvements.
(6) In 2015 we dissolved the remainder - i.e., I bought out my dads remaining of 10% for $40K.
(7) I have lived in the house since 1998 with my parents.
(8) Since dissolving the remained in 2015 I have spent $80K on new construction plans (architect etc.) but have not built anything off of it yet.
I want to get the full 250K capital gains exemption (as I have lived in the house with my dad since 1998 and was the owner on the deed per the life estate as of 2005 via the Life Estate - don't know how buying his remainder in 2015 effects actual time of ownership ownership).
Questions are:
(1) How do I determine my cost basis? What is my cost basis?
(2) The law says I have to live in the house for 2 of the past 5 years - check. It also says that I need to be owner for that time - when did I become the owner - 2005 when we did the Life Estate or 2015 when I bought out his remainder?
(3) If I tear down the house and sell it as vacant land with the architect plans how does everything get effected (cost basis / Cap gains)?
At the end of the day I want to know my costs basis and whether I can get the exemption? (I don't know if it matters but I live in NYC). Also please provide the IRS codes which would clarify these questions for later reference.
Submitted: 2 years ago.
Category: Tax
Expert:  Jonathan Tierney replied 2 years ago.

Hi, my name is ***** ***** my goal here is to provide you with the most complete and accurate answer possible.

Can you confirm that your mother and father owned the property jointly until her death? I have attached a spreadsheet calculated your basis assuming that they did own it jointly. Please let me know if this is not the case.

I have split the calculation of your basis between two main parts: you mothers portion and your father’s portion. Your mother’s portion is started based upon the home value at her date of death when her basis is adjusted. Since your father has gifted the home to you, you get a carryover basis in the home (his basis becomes yours). However, since he gifted to you only a 90% interest, you would subject 10% of his basis and add the $40K you paid for it. The original purchase price, improvements, and any costs planning further construction all add to your basis.

However, I do not believe you would qualify for the personal residence gain exclusion until you have owned 100% of the home for at least two years. This is because under Treasury Regulation 1.121(c)(3)(i) (you can read it here states that gifts in applying the ownership test of IRC 121 you have to apply the provisions of IRC 671 through 679. Those code sections provide the rules to determine whether a gift (generally through a trust) should be treated as a gift or included in a person’s estate at death. One of these provisions state that if the grantor of a trust (the life estate in your case) retain power to use or control the property, then a gift is not yet completely made and therefore the entire person’s original ownership interest is includible in his or her estate. Therefore, in applying these rules you would not be considered the owner until your father’s ownership completely ended in 2015.

I hope this answers your question. Let me know if I can clarify anything or answer any additional questions. Jonathan

Customer: replied 2 years ago.
I see what your saying however I certainly became an owner in 2005 (or the remainder interest). So if I occupied the premises for two years my remainder interest should qualify? Internal Revenue Code Section 121(d)(8)(A) addresses this-- It specifically addresses the sale of remainder interests only; I cannot imagine that if I qualify under this section for the sale of a remainder interest, that I would not also qualify when I "add" the life estate and merge the two interests to become owner of the whole. Can you advise
Expert:  Jonathan Tierney replied 2 years ago.

I believe IRC 121(d)(8)(A) addresses the issue of whether someone selling a remainder interest in their home would still be treated as as sale of their residence under IRC 121. It does not address the ownership requirement of IRC 121. For example, if your father sold the remainder interest to an unrelated third party, he would still qualify for a personal residence gain exclusion as he originally owned the entire interest in the property.

You should read this article, bullet point #3 that talks about life estate and the personal residence exclusion.

Customer: replied 2 years ago.
1) So I have no ownership in the eyes of the IRS from 2005-2015 for which I was named on the deed of the house? If anything I bought the remainder of my dads portion (10%) in January 2015 - so would I at least be eligible for the cap gains exemption for 90% of the house? Or I am totally ineligible?
(2) Also what portion is considered a gift? My parents owned the home jointly - when my mom passed we life estate between me and my dad so it would be considered a inheritance (not a gift), correct?
(3) And I bought his last 10% in January so also not a gift but a purchase?
(4) With me also living there as an owner for over 10 years I would think I would be eligible for something?Thank you for your feedback
Expert:  Jonathan Tierney replied 2 years ago.

Did you dad inherit your mom's interest in the house or did you receive here ownership interest through her will?

Customer: replied 2 years ago.
The deed says "dad as survivng tenant by the entirety of mom" and im named as the second party. The recording document to the city has my mom as grantor/seller and my dad as grantor/seller as surviving tenant. It has me as grantee/buyer. This was all in 2005
Expert:  Jonathan Tierney replied 2 years ago.

Based upon the deed your father inherited your mother's portion and then gifted to you the remainder interest in the house. You being named the second party means that you are next in line to inherit the house when both of your parents die. If you had inherited your mother's half of the house so you and your father are co-owners, I would say that you would qualify for the gain exclusion as you would own both a present and remainder interest in the property.

That is my interpretation of the code and regs. I cannot find any cases that are very similar to your own, so there is always a chance the IRS or courts will rule differently. You can ask the IRS for a private letter ruling. You can find the instructions on how to get one here: The IRS charges a user fee for this type of ruling of the decision is binding on the IRS for yourself only (they may not be cited as precedent). However, the risk is that if you do not like the ruling, you may be running a greater chance of being audited if you are prepared to challenge the IRS in court.

I hope this helps. The tax is get very ambiguous in complicated situations, as the statutes do not spell out the nuances of every possible situation. Let me know if I can help further. Jonathan