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Sold With Life Estate |
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Dear Edith: My Mother went to a Home, and we just sold her house which she had deeded to us five kids. She had retained a life estate. She signed the papers we all had to sign. She got her share, which the lawyer said was based on the life estate tables, which I have not been able to find, and the rest was divided among the five of us.
He told us we would have to pay a lot in taxes. I have been trying to find out why. I know she could give us each $11,000 a year tax-free, and double that for husband and wife, so I can't figure out why we will be taxed a lot. |
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You're right in thinking gift taxes aren’t involved at this point. What you're being faced with is capital gains tax.
When your mother gave you a share of the house, its cost basis remained the same. That would be original purchase price plus anything spent on permanent improvements over the years, and then sometimes a change in cost basis when your father died. If all that adds up to less than the sale price (and it usually does) then there's a taxable profit, a capital gain. Each of you must pay tax on your share of that gain.
The IRS has tables, based on her life expectancy, that determined the percentage of the proceeds due your mother for giving up her life estate. Her share of the gain may be tax-exempt because of the homesellers tax exclusion
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Edith
Originally published on January 6, 2006 |
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