A House Which a Parent Deeded With a Retained Life Estate to Child, Raises Surprising Tax Results

A House Which a Parent Deeded With a Retained Life Estate to Child, Raises Surprising Tax Results

I need advice on a real estate matter involving my mother's home. She died in 1999, and I wish to sell the home which she deeded to me in 1993, retaining a life estate. I never lived in the home. Do I owe any taxes on the money from the home sale?


The general rules for determining whether there is a gain on the sale of a residence will depend on whether or not the residence was your principal residence. As a principal residence, it may qualify for the exclusion of $250,000 of gain, or $500,000 of gain if you are married and filing a joint return. How does one determine gain and whether or not the exclusion is available? Gain is determined by the sales proceeds, less sales expenses, in excess of your tax basis in the home. This latter point appears to be the real issue in your case. If your mother reserved a life estate in the home, then for estate tax purposes, the home should be included in her taxable estate (whether or not she paid taxes and whether or not an estate tax return had to be filed on her demise). If the home was included in your mother's taxable estate, then it would receive what is called a "step-up" in tax basis. This means the tax basis of the home would increase to the value of the home on the date of her death. If you have not had the home appraised, then you should hire an appraiser to give you a written evaluation of the value of your mother's home at the date of her death. That should be your tax basis. If you are selling the home for no more than your tax basis, there should be no gain. This conclusion assumes that the life estate was properly structured so that it was, in fact, included in your mother's taxable estate. Your best bet is to start with an experienced attorney specializing in probate matters in your state. If that attorney is good at probate but does not have any background in tax planning, let him or her recommend an accountant that does. Caution: Remember that this is general advice, and it is critical that you discuss it with a probate attorney and an experienced probate tax accountant in your state before making any determinations.

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