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  1. #1
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    Jun 2020
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    Question Selling Property with Life Estate

    My question involves real estate located in the State of: Indiana
    Father gave daughter home and retained life estate in 2016. Because of father's health, daughter wants to sell home and have father move in with her in Florida. Is the property going to be subject to capital gains taxes or does the property get treated as dad's residence for the exclusion?
    Thanks,

  2. #2
    Join Date
    Jul 2018
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    Default Re: Selling Property with Life Estate

    Quote Quoting nts@simonic.net
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    Father gave daughter home and retained life estate in 2016.
    If he "retained [a] life estate," then he didn't really give her the home. Also, just to be clear, I assume this means that he executed and filed/recorded a dead that read along the lines of the following: "John Smith grants the property described below to John Smith for life, and then to Jane Smith." Correct?

    Also, are you John, Jane or someone else (and, if someone else, what's your relationship to these folks)?


    Quote Quoting nts@simonic.net
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    Because of father's health, daughter wants to sell home and have father move in with her in Florida. Is the property going to be subject to capital gains taxes or does the property get treated as dad's residence for the exclusion?
    The daughter can't sell the home on her own (unless she has a power of attorney or guardianship that gives her that authority). Is the father still mentally competent, and does he agree that the property should be sold?

    As for the question, I'm not sure what "exclusion" you're talking about, but I'll leave the tax issues for others.

  3. #3
    Join Date
    Sep 2010
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    19,684

    Default Re: Selling Property with Life Estate

    That wording that PG quotes ounds more like a TRANSFER ON DEATH deed rather than a grant reserving a life estate. If it were a TOD deed, you'd be right.

    If it was a deed with a reserved life estate, the daughter indeed owns the property and could convey her remainder interest if anybody would be interested in buying it. They'd still be subject to father's life estate.

    If she does it while father is still alive, she indeed can be subject to capital gains tax for that amount that the sale nets over her basis (which would be whatever the father's basis was, probably low).
    If she waits until father dies, then the property steps up in basis to the value at his death.

  4. #4
    Join Date
    Oct 2006
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    Default Re: Selling Property with Life Estate

    Quote Quoting flyingron
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    That wording that PG quotes ounds more like a TRANSFER ON DEATH deed rather than a grant reserving a life estate. If it were a TOD deed, you'd be right.

    If it was a deed with a reserved life estate, the daughter indeed owns the property and could convey her remainder interest if anybody would be interested in buying it. They'd still be subject to father's life estate.

    If she does it while father is still alive, she indeed can be subject to capital gains tax for that amount that the sale nets over her basis (which would be whatever the father's basis was, probably low).
    If she waits until father dies, then the property steps up in basis to the value at his death.

    Its safer to wait until dad passes away...all in all. However, it is possible to have dad sell his life estate to the same person who buys daughter's remainderman interest. That would lessen the potential capital gains, particularly if dad's life expectancy on the actuarial tables is decent.

  5. #5
    Join Date
    Nov 2013
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    Default Re: Selling Property with Life Estate

    Quote Quoting pg1067
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    If he "retained [a] life estate," then he didn't really give her the home. Also, just to be clear, I assume this means that he executed and filed/recorded a dead that read along the lines of the following: "John Smith grants the property described below to John Smith for life, and then to Jane Smith." Correct?

    Also, are you John, Jane or someone else (and, if someone else, what's your relationship to these folks)?




    The daughter can't sell the home on her own (unless she has a power of attorney or guardianship that gives her that authority). Is the father still mentally competent, and does he agree that the property should be sold?

    As for the question, I'm not sure what "exclusion" you're talking about, but I'll leave the tax issues for others.
    You got this one incorrect. I presume that you know what a life estate is and that any remainderman owns the property and is free to sell it if they can find a buyer. Likewise, the life estate can also sell their interest in the property if they can find a buyer.

  6. #6
    Join Date
    Oct 2014
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    7,957

    Default Re: Selling Property with Life Estate

    Quote Quoting nts@simonic.net
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    My question involves real estate located in the State of: Indiana
    Father gave daughter home and retained life estate in 2016. Because of father's health, daughter wants to sell home and have father move in with her in Florida. Is the property going to be subject to capital gains taxes or does the property get treated as dad's residence for the exclusion?
    Thanks,
    If your father transferred the home to you and retained a life estate for himself, then pretty much any buyer will want both you and your father to sell your respective interests — his life estate and your remainder interest — so that the buyer obtains the whole of the property. In that sale both you and your father will have a capital gain/loss determined by taking each of your share of the sale proceeds (which would be computed by allocating the sales price based on IRS tables used to value life estates) and subtracting from that your respective bases in the property. You'd then each look to the rules for the exclusion of gain on the sale of a principal residence to determine what part, if any, of the gain you each may exclude from income. Your post suggests that you have not been living in the home and thus if you do not meet the residence test you will not be able to exclude any part of the gain on the sale of your remainder interest. But your father may be able to exclude some or all of the gain on the sale of his life estate interest.

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