Tax in a Life Estate Sale

[Shafi Noss]

This is not a situation I have in front of me but I'm doing some exploratory thinking. 

What if I was talking to an elderly couple that were concerned they would run out of money but want to continue living in the house, so they want to sell to me in a life estate. I do the actuarial math and we agree on a purchase price. How do the taxes work on this?

[David M.]

@Shafi Noss

Yeah, I don't think you'll get a "real" answer on a public forum --- you might.  Best to consult with a qualified professional, or multiple reall

Since Title transfers on death, the stepup in basis would make the most sense at FMV.

Meanwhile, the cash you gave them as compensation for the interest in the Title, i.e. the remainderman, is basically income to them.  It'd probably go towards capital gains (adjusted by their cost basis, etc.).  

Remember the life estate is gifting the interest in the Title to the remainderman, as normally explained...  So, in this case you are compensating them for the interest.  Not sure, however, is sec121 would apply to the owner since they haven't liquidated their entire interest...

Also, from what little I've spoken to an attorney about this, its still more "complicated" than how the websites make it sound.

Of course, maybe there is a specific statute or case law out there for what you are asking.  But, it is very interesting...