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  1. #1
    Join Date
    Jun 2009
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    6

    Default Capital Gains Taxes on a Life Estate

    We are considering a transfer of our home to an adult child while retaining a life estate.
    We want to minimize capital gains the remainderman would pay later.

    What is the difference between transferring in a life estate and gifting in terms of how the transfer form is filled out?
    We are considering a deed which includes the language "the grantors retain a life estate."
    On the transfer return form, the fair market value would be listed, and transfer would be exempt from the transfer fee as a gift.
    Does making the transfer a gift cause the grantee to have our basis for capital gains?
    Is it correct that because we retain a life estate, the property becomes part of our estate at our deaths and is then inherited?
    If yes, how should the transfer be classified?

  2. #2
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Capital Gains/Life Estate

    Quote Quoting 445orange
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    We are considering a transfer of our home to an adult child while retaining a life estate.
    We want to minimize capital gains the remainderman would pay later.

    What is the difference between transferring in a life estate and gifting in terms of how the transfer form is filled out?
    We are considering a deed which includes the language "the grantors retain a life estate."
    On the transfer return form, the fair market value would be listed, and transfer would be exempt from the transfer fee as a gift.
    Does making the transfer a gift cause the grantee to have our basis for capital gains?
    Is it correct that because we retain a life estate, the property becomes part of our estate at our deaths and is then inherited?
    If yes, how should the transfer be classified?
    You would be gifting your son the home whether you retain a life estate or not. That means that your son's basis in the home will be your basis, and your son will pay capital gains tax on the entire gain. That could be tens of thousands of dollars in tax.

    On the other hand, if your son inherits the house, then he will have a stepped up basis and would likely pay no capital gains tax at all.

    If you are trying to protect the home in some way, do some research into trusts.

  3. #3
    Join Date
    Sep 2005
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    Behind a Desk
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    98,846

    Default Re: Capital Gains/Life Estate

    If they give a future interest to their son by making him remainderman, reserving a life estate to themselves, their son should get a step up in basis at the time of their deaths just as he would with an inheritance. But yes, trusts are generally a better option for a number of reasons.

  4. #4
    Join Date
    Jun 2009
    Posts
    6

    Default Re: Capital Gains/Life Estate

    Quote Quoting Mr. Knowitall
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    If they give a future interest to their son by making him remainderman, reserving a life estate to themselves, their son should get a step up in basis at the time of their deaths just as he would with an inheritance. But yes, trusts are generally a better option for a number of reasons.
    Why are trusts a better option?
    Is one reason that, a possible repeal of the estate tax, will end the step up in basis?

  5. #5
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: Capital Gains Taxes on a Life Estate

    The main benefit of a trust is to avoid probate after death. But for most simple estates, probate is not the giant scarey beast many people think it is, but it can be slow, tedious, and somewhat expensive. California probate is very nasty, while Florida probate is usually a breeze, so the state involved makes a difference as well.

  6. #6
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Capital Gains/Life Estate

    Quote Quoting Mr. Knowitall
    View Post
    If they give a future interest to their son by making him remainderman, reserving a life estate to themselves, their son should get a step up in basis at the time of their deaths just as he would with an inheritance. But yes, trusts are generally a better option for a number of reasons.
    While I tend to agree with you that a life estate should give a stepped up basis, there has been significant disagreement on that issue...on THIS forum.

    Therefore I do tend to suggest trusts over life estates, and as you stated they are generally a better option for other reasons as well.

    A life estate is a good option for a situation that is a second marriage, and the homeowner wants his/her spouse (non-owner) to be able to reside in the home for their lifetime, but wants his/her children to inherit.

    Otherwise, a trust is usually better

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