Life Estate Deed Question that Cannot be Found on Google

Chattanooga, Tennessee
Tax, SDIRAs & Cost Segregation
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Life Estate Deed Question that Cannot be Found on Google

James Sykes
Member since 2018 · 3 posts · 1 vote

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

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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y

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! 

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  • Dan Marriggi
    Rental Property Investor · Scranton, Boston · Member since 2013 · 101 posts · 40 votes
    2y
    I created a similar event with my own dad and siblings. 
    Your answers depend on what state you're in and its laws on property transfer. Some states allow tax and fee free transfer between spouses. This is an example of the fee structure in my state of PA :
    (some real estate transfers are exempt from realty transfer tax, including
    certain transfers among family members, to governmental units,
    between religious organizations, to shareholders or partners and to or
    from nonprofit industrial development agencies. Deeds to burial
    sites, certain transfers of ownership in real estate companies and
    farms and property passed by testate or intestate succession are also
    exempt from the tax)

    There should be no taxable event unless a sale occurs or when your dad passes.

    At that point, you should receive the property at the stepped up basis as the life estate is null due to the death.
    This is tricky - it will depend on how the deed is held.
    You should check with the attorney who made the initial change and check with your CPA once you find the answers from said attorney.



    0Reply
  • Dan Marriggi
    Rental Property Investor · Scranton, Boston · Member since 2013 · 101 posts · 40 votes
    2y
    Good Luck and let us know how it turns out.
    0Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y

    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! 

    1Reply
  • James Sykes
    OP
    Member since 2018 · 3 posts · 1 vote
    2y

    Zachary,

    Thank you for the detailed response.  I will use some round numbers to resummarize what I am hearing.  The property is roughly valued at $1M based on the realtors estimate.

    2022 transfer to LE deed.  My dad retained a life estate share of the property with both sons having equally divided remaindership.  Roughly the following:

    LE share (dad) at 40% and each son having 30% each.  The LE deed calculations stated property tax value at roughly $300,000 total (all shares).  My dad essentially had $120,000 and each son had $90,000.  No appraisal was performed.  The values here were state required calculations included by the attorney to show an example of value share split.

    2024 events:

    Dad has aged so his LE value is close to 30% and each son had 35%.  I will assume the total cost basis for the property is $500,000.  He built his own home, so there is no ‘sale’ value here.  When it was purchased in 1995, it was raw land.  Numerous improvements have made over the years.

    Dad wants sell the property this year, so I will assume it sells for $1M.

    Dad’s LE share would be $300,000.  He can use cost basis here - 30% of $500,000 would be $150,000 cost basis.  Capital gains would be 0 because he has not hit the threshold for gains on a primary home sale.

    Dad’s remaindership share (portion that was my brothers) is 35% and carries a $0 cost basis.  There was no financial transaction from brother’s ownership to my dad.  My dad would be responsible for capital gains on the full amount.  Additionally, my brother would responsible for claiming gift tax on the $350,000.

    My remaindership share is 35% and I will need to claim capital gains on the difference of carryover cost basis.  Is my cost basis same as my dad’s ($500,000) or would it be based on the value in 2022?  Since there is no appraisal, I assume it’s development costs and same as my dad.

    Some additional questions….

    Does my dad have to claim gift tax for any portions of this transaction?  Like the gift he made to me for remaindership share.

    I also assume there are some unknowns with state, county, or city taxes for transfers or sales.  I have not dug into that yet.

    With the figures used here, would gift tax apply to this transaction for my brother?

    Thanks again for your time answering these questions.  It has been super helpful understanding my assumptions.  I will seek some professional help in Tennessee.  Hopefully I can someone in this community who specializes in real estate transactions.

    0Reply
  • James Sykes
    OP
    Member since 2018 · 3 posts · 1 vote
    2y
    Quote from @Dan Marriggi:
    Good Luck and let us know how it turns out.

     Thank you!  Appreciate your reply.  I will definitely follow up here. This is a complex issue and I know the community would benefit from learning about our decisions.

    0Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @James Sykes:

    Zachary,

    Thank you for the detailed response.  I will use some round numbers to resummarize what I am hearing.  The property is roughly valued at $1M based on the realtors estimate.

    2022 transfer to LE deed.  My dad retained a life estate share of the property with both sons having equally divided remaindership.  Roughly the following:

    LE share (dad) at 40% and each son having 30% each.  The LE deed calculations stated property tax value at roughly $300,000 total (all shares).  My dad essentially had $120,000 and each son had $90,000.  No appraisal was performed.  The values here were state required calculations included by the attorney to show an example of value share split.

    2024 events:

    Dad has aged so his LE value is close to 30% and each son had 35%.  I will assume the total cost basis for the property is $500,000.  He built his own home, so there is no ‘sale’ value here.  When it was purchased in 1995, it was raw land.  Numerous improvements have made over the years.

    Dad wants sell the property this year, so I will assume it sells for $1M.

    Dad’s LE share would be $300,000.  He can use cost basis here - 30% of $500,000 would be $150,000 cost basis.  Capital gains would be 0 because he has not hit the threshold for gains on a primary home sale.

    Dad’s remaindership share (portion that was my brothers) is 35% and carries a $0 cost basis.  There was no financial transaction from brother’s ownership to my dad.  My dad would be responsible for capital gains on the full amount.  Additionally, my brother would responsible for claiming gift tax on the $350,000.

    My remaindership share is 35% and I will need to claim capital gains on the difference of carryover cost basis.  Is my cost basis same as my dad’s ($500,000) or would it be based on the value in 2022?  Since there is no appraisal, I assume it’s development costs and same as my dad.

    Some additional questions….

    Does my dad have to claim gift tax for any portions of this transaction?  Like the gift he made to me for remaindership share.

    I also assume there are some unknowns with state, county, or city taxes for transfers or sales.  I have not dug into that yet.

    With the figures used here, would gift tax apply to this transaction for my brother?

    Thanks again for your time answering these questions.  It has been super helpful understanding my assumptions.  I will seek some professional help in Tennessee.  Hopefully I can someone in this community who specializes in real estate transactions.


     There would be some gift tax for those involved in "gifting" you the equity in the property since the exemption for gift tax for 2024 is 18k. Hope that helps in general. I would want to dive deeper into this to get the exact figures. As you mentioned there are unknowns and everyone's situation is different! 

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