Will a Contract to Sell a Property in a Life Estate Affect the Step-Up in Basis?
I have a question about my mother’s two-family house. It’s amazing that she has survived the pandemic and will be turning 104 in September. She is in a nursing home and is covered by Medicaid.
This house was gifted to me and my sister in the 1980s but my mom retained a life estate. Her unit remains unoccupied and I pay for those costs and we then remit the net income of the tenant’s unit to the nursing home. A developer has expressed interest in the house, or really the property, since he would demolish it and build a new structure. My sister and I are willing to enter into an agreement which will not close until after my mom’s death. Outside of the actual agreement, my main concerns are that we qualify for the step-up in tax basis when the property is eventually sold and that anything we do doesn’t impact my mom’s Medicaid eligibility.
Any agreement you and your sister make with the developer will not affect either the step-up or your mother’s continuing Medicaid eligibility. You would be contracting as owners of the remainder interest in the property, which is totally separate from your mother’s life interest, so irrelevant to her MassHealth eligibility or her retained interest. It also would not affect the property’s step-up in basis upon your mother’s death, since it does not affect her life interest which is what qualifies the property for the step-up. Just as a reminder, the entire value of the property will be in your mother’s taxable estate, which is probably only relevant if she lives in a state with an estate tax.