Question:

Both of my parents had a life estate, deeded as tenants in common to my brother and myself as remaindermen. Our father passed in 2006 when home was assessed at $100,000. The life estate deed was issued in 1987 when value of home was $35,000. We sold home in November 2017 with our mom, 94 years old, still living. Do remainderman get a cost basis adjustment of about $50,000 as an inheritance when father passed? If not, how do we determine our cost basis?

Response:

Normally, when a joint owner of property dies, the property’s basis gets a partial adjustment. In your parents’ case, the adjustment would be to $67,500. There are two ways to calculate this. You can add the original purchase of price of $35,000 to the value at your father’s date of death of $100,000 and then divide the total of $135,000 in half (($35,000 + $100,000) ÷ 2 = $67,500). Or you can add together one half of the two figures (($100,000 ÷ 2) + ($35,000 ÷ 2) = $67,500). You get to the same result either way.

The question is whether the fact that the house was in a life estate change this. It does not. So the basis in your family house is $67,500.

The next question is, who has to pay any tax on the gain? The proceeds of the sale should be apportioned based on your mother’s age. At 94, the bulk of the proceeds should go to you and your brother. The exact proportion depends on standard interest rates that the IRS issues each month. Based on generally low rates currently and your mother’s low actuarial life expectancy, about 8% of the proceeds should go to your mother and 92% to you and your brother. Your accountant or estate planning attorney can do the exact calculation based on current interest rates.

Assuming your mother was living in the house until recently, she will not have to pay any taxes on her share of the capital gain since she can exclude $250,000 of gain on the sale of her home. Your brother and you do not benefit from this exclusion and will have to pay taxes on your share of the gain which, unfortunately, will be most of it. If you were able to wait to sell the property until your mother’s death, you would receive a step-up in basis at that point, eliminating any capital gain and result tax.

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