Re: life estate

Good luck on your exam.

Re: life estate

Any gain or loss is reportable in the year of sale. Basis depends upon how title was acquired, i.e., original purchase, gift or inheritance. Since the property was inherited, to the extent of 1/2, the basis for the owner of this 1/2 (daughter) is one-half of the value on the date of death of the person leaving the interest. If the daughter made any improvements since she inherited, this can be added to her basis. If the daughter considered the property as rental, and was eligible to take or took depreciation, there is an adjustment to basis, reducing it by the amount of eligible depreciation. In any event, the sale date determines the year in which the sale has to be reported, and 1/2 of the sales proceeds is to be reported. Basis remaining (inherited value or inherited value reduced by eligible depreciation, is further adjusted by selling costs (brokerage fees, legal fees, and the like). If the daughter was not using the house as her primary residence, any ultimate gain/loss is reported, as either long or short-term gain/loss depending upon how long she owned the interest. The reporting is further complicated depending upon whether or not the house was her primary residence and her holding period, and she may be eligible not to report any gain if it was her primary residence for 2 of the preceeding 5 tax years. I suggest an accountant or tax attorney be consulted to assist is calculating basis and determining how the sale should be reported.

Re: life estate

From your wording I believe only the daughter owns the house after the sister dies and has the entire basis that her father had plus any improvments made by herself or the sister.