give back a life estate

What is the name of your state? CA

I received life estate from parents on some property >5 yrs ago. Now they want it back. I have made some improvements >$60k.
What is the best way to handle for all parties to avoid tax liability. I thought of a gift of money from them - however they are getting value back - i.e. a clear title.
Thanks for all responses.

[abezon]

To avoid tax problems, they need to pay you the fair market value of the inprovements. If you make a profit, you can exclude the gain under section 121. If you just give them back the life estate, you'll need to file a gift tax return showing a gift to them of the FMV of the improvements + the value of the life estate. Good luck valuing the LE!

Thanks for your quick response. I thought section 121 only applied to gains from a sale of a primary residence - are there other parts I am not aware of? As this property was not my residence - the improvements were a shop/storage building and some road improvements. My parents may give me more than that amount - therefore I would expect some income over my actual costs.

[abezon]

Ah. You didn't specify commercial, so I assumed it was a residence. Silly of me. You are correct -- you'll pay capital gains taxes on the profits.