What are the federal tax implications if parents sell their house to their children at fair
market value, taking back a life estate which ,of course, lasts until the last parent dies?
What is the tax basis of the children in the home? It obviously includes the fair market
purchase price. But how is the life estate handled? It is obvious that a purchase in fee
simple should be worth more than a home encumbered by two life estates of the parents.
So should fair market value at time of purchase be valued by taking into account the life
expectancy of the parents discounted by a reasonable interest rate?
If this is done you might have a situation where the regular fair market purchase value
might be $300,000 if there is no life remanderman . Assume the value of the
remanderman is $100,000. Therefore the adjusted fair market value would be only
$200,000. What is the tax basis for the children when the last parent dies? It obviously
includes the purchase price of $ 200,000. But what about the $100,000 (life estate)
remainderman encumbrance which disappears at death when the children acquire full
title. If the parents lived 2/3 of there joint expected remaining lives -- (say they lived
out 12 of the expected 18 years). Can one argue that the children tax basis is $200,000
plus $33,000 by using the fair market value remaining at time of death?
If the children did not buy the house but inherited it, their basis would be $300,000.
But if they bought it for $200,000 most people would say that their basis is $200,000.
However, that would ignore the value of the remanderman which obviously had a value
which had a life of its own. A life estate or remanderman means that the parents can
live in the home for the rest of their lives without paying rent.
2006-11-08
02:40:43
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2 answers
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asked by
JOHN
2
in
Renting & Real Estate