Terminate Life Estate

[jdr4170]

My question involves real estate located in the State of: Alabama

I, life tenant and the remainderman have agreed to to sell property due to health changes. Best to terminate or show both as sellers, Life Estate was recorded in April 2013.

Thanks for looking, John

[flyingron]

Shouldn't make a difference as far as selling. However, there's going to likely be a substantial tax benefit to NOT terminating the life estate first.

If you give up your life estate before the property is sold, your remainderman now have your basis in the property (probably pretty low). When it sells, they will owe capital gains on the difference between that and the sales price (less commission, etc.)

If you sell the property along with your life estate, then though the basis is the same, the capital gains are apportioned between you and the remainderman. If you lived in the property as your principal residence, you can likely exclude up to $250,000 of your gain.