Taxes on Home Sold Held in Life Estate

[Susan M.W.]

I originally posted this message under real estate and was referred to tax law. My father owned a home in New York State and in 1999 transferred it into his three children's names, retaining a "life estate" in the property which allowed him to live there for the rest of his life and maintain all credits for property taxes under veterans, senior citizens, etc. There was no exchange of monies in this transfer, merely a filing of a new deed. My dad passed away in early 2001 while still living in his home. The house was sold in the summer of 2001 with the proceeds evenly divided among his three children. Other than his home and a joint checking account with my sister, my dad held no other assets, therefore, his Will did not go through probate because the major stipulation in the Will (house to be sold and divided three ways upon his death) was already addressed at the time of the deed transfer. My question involves the impact of the life estate on the sale of the house. Is there capital gains tax involved for his three children, or because he held onto the house until he passed away, does it now become an inheritence? I appreciate any information you can provide.

 

[loku]

The house became the property of the three children at the time of the transfer in 1999, and therefore was not part of the estate. The property was subject to the life estate until your father’s death; however, the life estate ended automatically at your father’s death and it has nothing to do with the gain or loss on the sale of the property.

If the fair market value of the property was equal to or greater than your father's adjusted basis at the time of the gift, and if no gift tax was paid on the gift, the basis to the children for purpose of gain or loss on the sale is your father's adjusted basis at the time of the gift. There is gain if (1) the sale price less the costs of selling the property is greater than (2) the basis plus and any additions made to the property.