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Parents transferred residence to two adult children and

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retained Life Estate in the...
Parents transferred residence to two adult children and retained Life Estate in the property . Now they sold the property , who reports the gain the two adult children split it, and there basis would be the parents cost basis , that is what they paid for home plus improvements? No home residence exclusion allowed? Maybe for the sister since she lived in the property for more than 5 years. Thanks Bob
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Submitted: 1 year ago.Category: Tax
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Answered in 59 minutes by:
3/19/2016
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,876
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi - OK the first thing to isolate is whether the property was sold before or after the passing of the life tenant. If sold after the life tenant passes, all basis is stepped up for the remaindermen.

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Second, if the property is sold while the life tenant is alive, then the gain is apportioned between all parties.

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Third, if ANY of the parties (certainly the life tenant, if still alive) satisfy the 2 out of 5 primary residence test, then $250,000 of gain ($500,000 for those married filing jointly) will be excluded.

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Finally the way that the gain is apportioned among the parties if sold before the life tenant passes is as follows:

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1. When the owner of a “life estate” interest sell his/her life estate, then the following is how the IRS views the distribution of proceeds between the life estate owner (the life tenant) and the owners of the remainder interest (the remaindermen).

2. The age of the life estate owner is a factor. The ages of remaindermen aren’t factors.

3. According to the IRS, the value of the life estate interest and the remainder interest are determined under charts set by the United States Secretary of the Treasury {Internal Revenue Code section 7520(a)}. 10 4. Use section 7520(a) Interest Rate (see IRS’s website to check 7520(a) interest rate).

4. Use section 7520(a) Interest Rate (see IRS’s website to check 7520(a) interest rate).

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

I hope this has helped.

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Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd really appreciate a positive rating (using the rating request, faces, or stars on your screen)

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That's the only way I'll be credited for the work here.

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Thank you!

Lane

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 1 year ago

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane

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