A man now only holds a life estate for the house he lives in and signed the deed over to his 2 daughters. Can he sell the house and avoid the capital gain fees because he has lived there for 2+ years out of the past 5 years. Or do his daughters have to sell the house and property and pay the capital gain?
Currently the father owns a life estate and the daughters own the remainder interest. The family can sell the home together but no owner in this situation can force the sell of the entire property without a court order.
Once the family members determine they wish to sell the property, each member will be compensated based on the ownership interests. The father’s interest is based on his life expectancy. His ownership decreases with each birthday and is determined based on federal charts. The daughters would then split the proceeds.
The life estate does allow him to qualify for the exclusion amount. The daughters, however, may be subject to significant capital gains depending on when they last lived at the property. The daughters’ basis in the property is a carryover basis. In other words, when father made the gift to the daughters, they inherited his basis.
Should the family keep the property, upon father’s death the value of the property will be included in the father’s gross taxable estate because under the tax law he had given away property but still kept some control over it. The daughters would now inherit the property at a basis that is stepped up to fair market value on the date of the father’s death. There would be no capital gain on the sale of the house if the sell took place relatively soon after the father’s death.As you are an income beneficiary, the income tax liability generated from the trust will flow out to you when the income is distributed. The Trustee will issue a k-1 for you each year so that you will know what to report on your individual income tax return.
Margaret L. Cross-Beliveau, Esq., LL.M.
Legal Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on since each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship. A lawyer experienced in the subject area and licensed to practice in the jurisdiction should be consulted for legal advice.
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