Life Estate Deed Question that Cannot be Found on Google

[James Sykes]

Hey Biggerpockets Community!  I have a tricky question that I cannot find any good answers for on the internet.  Big fan of everything you give to our community.  Here we go….

So my dad signed over his estate (house and land) to both his sons (me and Travis) through a life estate deed in 2022.  The intention of this instrument was to avoid the probate courts and to provide for step-up basis when he passes.  My question is not related probate or step-up because he has not decided to sell the property.

In 2022 my dad held a life estate interest in the property at the same time providing a remaindership to both his sons.

In 2024 my brother Travis gave his share back to my dad through a quit claim deed.  Now my dad owns his life estate portion plus the remaindership portion from my brother.  I still own 1/2 of the remaindership portion.

Here are the questions….

For my portion, do I retain the carryover basis from value of property gifted to me from my dad?

If yes, then I assume my brother would have similar basis if he still retained ownership via remaindership.  But since my brother gave back his portion, does my brother need to claim gift tax for transfer of property to my dad.

Does my dad’s cost basis for value of estate apply only to the life estate portion?  I assume this because it is the only straight line value he retained in this event.

My dad now has his son’s (Travis’s share) remaindership given back to him.  I assume this share has a $0 cost basis.

I am trying to figure out the tax implications of these events.  What started out as good intentions, has now tuned into an assumed mess of a tax situation….

Your help is greatly appreciated!  I am also open to phone calls or DMs regarding this.  I am desperately trying to understand and advise my dad on repercussions about this sale.

Best, 

James

[Account Closed]

Hey James, 

Consider the following points

1. Retaining Carryover Basis for Your Portion:
   • Since your brother transferred his share back to your dad, you would retain the carryover basis for the portion originally gifted to you by your dad. The basis of the property remains the same as when it was transferred to you.
2. Gift Tax Implications for Your Brother:
   • Your brother may need to consider potential gift tax implications for transferring his share back to your dad. The transfer of property back to your dad via a quitclaim deed can be viewed as a gift from your brother to your dad. However, whether gift tax is applicable depends on the value of the property transferred and the lifetime gift tax exclusion amount, among other factors.
3. Cost Basis for Your Dad's Portion:
   • Your assumption is correct. Your dad's cost basis for the portion of the property he now owns outright (his life estate portion plus the remaindership portion he received back from your brother) would likely be based on the value of the property at the time it was originally transferred to both you and your brother. This applies only to the portion he now owns outright.
4. Cost Basis for Your Brother's Former Share:
   • Since your brother transferred his share back to your dad, his share would likely have a zero basis for tax purposes. When he initially received the remaindership interest, he likely received it with a carryover basis. However, upon transferring it back to your dad, the basis is not relevant anymore.

In the end I would highly recommend you reach out to a tax professional here to get this sorted out. Best of luck!