Should We Sell Our Parents’ Home in a Life Estate?
My parents have had a life estate for 12 years. The deed is in their adult children’s names. Both parents are in a nursing home where their Social Security and pension pay for their care and Medicaid picks up the rest. My question is, if we sell their home, are they entitled to any of the proceeds?
Yes. You, your siblings, and your parents are all co-owners of the house with your parents and have a current right of possession of the property. In legal terminology, your parents are the “life tenants” and you and your siblings are the “remaindermen.” Your parents can live in the house or rent it out and receive the rental income. At their deaths, their interests are extinguished and the property will belong totally to you and your siblings.
If you were to sell the house during your parents’ lives, the proceeds would be distributed according to each owner’s interest. The calculation of your parents’ interest is based on their age at the time as well as current interest rates. The IRS provides tables for making this calculation here.
So, if you were to sell the home, a portion of the proceeds would go to your parents and have to be spent down on their care. The older they are, the smaller their share. It’s also possible that the Medicaid agency has a lien on the property and would simply take your parents’ share directly from the closing.
Another potential factor to consider in determining whether to sell the house has to to with capital gains taxes. While homeowners can exclude $250,000 of gain on their home’s sale ($500,000 for a couple), this exemption would only apply to your parents’ share of the proceeds. You and your siblings would have to pay taxes on any gain apportioned to your share of proceeds. This would not be the case if you waited to sell the property after both of your parents have died. Then the property gets what’s called a “step up” in basis, eliminating any taxable gain. Since I don’t know whether your parents’ house has had any significant increase in value since they bought it, I don’t know whether this should be a significant factor in your decision to keep or sell it.