Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
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?
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...
Well, this is interesting.. In a life estate, the Title transfers upon death. So, since you said it was a "sale," when were thinking of transferring funds? Upon the creation of the life estate? I think these funds would be your main issue. I guess it'd be a regular purchase somehow, since the life estate is usually done as a gift to my layman's understanding.
Upon death, Title transfers then the liabilities / taxes are your problem. I THOUGHT the cost basis would be the FMV, basically the usual step up in basis upon death.
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
2y
I was thinking of it as an alternative to a reverse mortgage. The elderly seller gets funds when they sell me the remainderan status. In this way they get some cash to live with and I get title to the property when they die. Perhaps they have no heirs and I can get a good deal this way since I can afford to be patient.
For their side, do they pay normal capital gains like a sale or no gains like a mortgage, or something else?
For my side, is my basis FMV when I bought remainderman status or when title transfers? It sounds like you are saying when title is transferred.
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...
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
2y
In that case seems not very favorable for the seller since they could take a reverse mortgage and avoid the taxes. Maybe a little hard to pitch, but I guess they're not on a clock at the same time. What is sec121? I'm not familiar with that.
sec121 --- irs code allowing $250k, $500k if married, exclusion of capital gain if primary residence 2 of past 5 years...
yup, from the "basic" principals as I know them, its not designed as an investor tool for a delayed sale. Probably better you tool up to get into the reverse mortgage game... That's basically what you just did, but at 0% interest --- which the IRS would "come after" for anyway...
Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
2y
I am not sure if you meant to say designed or designated, but I'll have to look at the specific situation to understand whether it's appropriate. Thanks for your input.
To my understanding, the life estate was NOT "designed" to be used as an investment tool. Just like how residential conforming loans are not designed to be used for investors. It doesn't stop them from complaining about it...
But definitely see if a qualified professional, potentially a specialist in estate planning, has any more info.