Discussion:Basis for rental house subject to life estate
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Discussion Forum Index --> Tax Questions --> Basis for rental house subject to life estate
| 26 June 2007 | |
| Carol (a Medi-Cal recipient) moved into nursing home in 2006, leaving her home to son George via quitclaim deed, and reserving a life estate. She also assigned any future rents to George in a notarized document, in order to ensure that she wouldn't lose her Medi-Cal benefits, due to receipt of rental income. George began renting out the house in 2006, investing his own funds in repairs and improvements. Since he only has a remainder interest in the house, until Carol dies, what is his basis in the house, for purposes of depreciation? And then, after Carol dies, is it correct that he will receive a stepped-up basis in the house, reduced by any depreciation that he has claimed? Also, for IRS purposes, before Carol's death, what percent interest does George have in the property? | |
| 26 June 2007 | |
| What you describe gives George effective ownership of the house, albeit in two pieces. The basis for depreciation is the lower of Carol's basis or fair market value at the time of the transfer. Step up at Carol's death would seem to depend on whether Carol retained certain rights on the transfer of the income stream, such as the right to take it away from George and give it to someone else (but not herself). | |
| 26 June 2007 | |
| Carol did not reserve any rights on transfer of rental income. She flat-out granted all future rents to George. | |
| 26 June 2007 | |
| With a retained life estate, George can only depreciate his interest - see Beatle Freds discussion in Discussion:* House Buyout * Actually, read every post EXCEPT Beatle Fred's.
So Dennis, I think his basis is NOT the entire basis of Carol. | |
| 27 June 2007 | |
| I agree with Dennis. The life tenant computes depreciation as if he were the absolute owner of the property. Sec. 167(d).
Also, the basis of the property will be adjusted to fair market value on the date of his mother's death since she has a retained life estate (right to designate, either alone or with another person, the persons who will possess or enjoy the property). | |
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