• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Tax Laws on life estate

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

sweetapple

Junior Member
What is the name of your state? New Jersey

What if any taxes are to be paid by the deed title holder once the life tenant dies?
 


seniorjudge

Senior Member
sweetapple said:
What is the name of your state? New Jersey

What if any taxes are to be paid by the deed title holder once the life tenant dies?
Are you asking what the remainderman pays when the life tenant dies?

Why would the remainderman pay taxes on an extinguished life estate?
 

sweetapple

Junior Member
seniorjudge said:
Are you asking what the remainderman pays when the life tenant dies?

Why would the remainderman pay taxes on an extinguished life estate?
Yes, I am asking what the remainderman pays in taxes when the life estate tenant dies. I was told by a lawyer that with life estates there is a hugh tax burden for the remainderman since the life estate tenant did not file a gift tax return when the deed was passed over 9 years ago. Is this true?
 
Last edited:

abezon

Senior Member
The tax burden would be from the fact that the reaminderman does not get any step up in basis when the life tenant/donor dies.

The donor's failure to file a gift tax return is irrelevant unless the donor had an estate that exceded the maximum tax-free estate (currently $1.5M).
 

sweetapple

Junior Member
abezon said:
The tax burden would be from the fact that the reaminderman does not get any step up in basis when the life tenant/donor dies.
what does this mean? when tenant dies reminderman pays a tax? I don't understand how a step up in basis works. House is worth 450,000 and was purchased in 1969 for 29,000
 

anteater

Senior Member
sweetapple said:
what does this mean? when tenant dies reminderman pays a tax? I don't understand how a step up in basis works. House is worth 450,000 and was purchased in 1969 for 29,000
Depends. If the remainderman sells the house, then he/she will have a capital gain and have a capital gains tax to pay. Assuming the remainderman was gifted the ownership interest, the remainderman receives the donor's cost basis -- in this case $29K plus the cost of any improvements made over the years. And the capital gain subject to tax is the difference between the net proceeds from sale and that adjusted cost basis.

But, if the remanderman moves in and lives there for a couple years, he/she would qualify for an exclusion from capital gains tax of some portion of the gain.

A step-up in cost basis is what happens to assets owned by a decedent when they pass away. The assets receive a step-up in cost basis to the fair market value of the assets on the day of death. Beneficiaries receiving those assets take on that stepped-up cost basis as their own. That can minimize or even eliminate any capital gains if the beneficiaries sell the inherited assets.

From a potential capital gains tax point of view, it is preferable to inherit assets with a stepped-up basis than to receive them as a gift.
 

sweetapple

Junior Member
anteater said:
Depends. If the remainderman sells the house, then he/she will have a capital gain and have a capital gains tax to pay. Assuming the remainderman was gifted the ownership interest, the remainderman receives the donor's cost basis -- in this case $29K plus the cost of any improvements made over the years. And the capital gain subject to tax is the difference between the net proceeds from sale and that adjusted cost basis.

But, if the remanderman moves in and lives there for a couple years, he/she would qualify for an exclusion from capital gains tax of some portion of the gain.

A step-up in cost basis is what happens to assets owned by a decedent when they pass away. The assets receive a step-up in cost basis to the fair market value of the assets on the day of death. Beneficiaries receiving those assets take on that stepped-up cost basis as their own. That can minimize or even eliminate any capital gains if the beneficiaries sell the inherited assets.

From a potential capital gains tax point of view, it is preferable to inherit assets with a stepped-up basis than to receive them as a gift.

Thank you.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top