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119458xring

Confused Remainderman

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Mary and John set up a life estate in which they were the life tenants for a section of farm land.  John Jr is the remainderman.  John Sr passed away approximately 15 years ago, Mary died about 10 years later (5 years ago).  An appraisal was done on the land after Mary passed.  If John Jr chooses to sell the farm land now is he able to use the appraised value at the time of Mary's death as a basis to determine his gain for tax purposes?

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4 hours ago, 119458xring said:

Mary and John set up a life estate in which they were the life tenants for a section of farm land.  John Jr is the remainderman.  John Sr passed away approximately 15 years ago, Mary died about 10 years later (5 years ago).  An appraisal was done on the land after Mary passed.  If John Jr chooses to sell the farm land now is he able to use the appraised value at the time of Mary's death as a basis to determine his gain for tax purposes?

 

I assume that the property at issue here was located in Washington state and was thus community property for Mary and John Sr. When Mary and John Sr. transferred the property, they each transferred their respective community property interests (usually 50% each) to John Jr. When John Sr. died, that means that under Internal Reveune Code section (IRC) § 2036 the entire value of what John Sr transferred, i.e. the value of half the property, was includible in his estate for federal estate tax purposes. In turn John Jr. then got a step up in basis to fair market value in that half of the property under IRC § 1014, which provides that the basis of property received from a decedent is the fair market value of that property at the time of death to the extent it was incluible in the gross estate for federal estate tax purposes. Similarly, when Mary died, the value of half the property gets included in her estate for federal estate tax purposes and thus John Jr. gets a step up in basis to fair market value in half the property as of the date of Mary's death. See United States v. Heasty370 F.2d 525 (10th Cir. 1966) and IRS Revenue Ruling 69-577, 1969-2 C.B. 173 (1969).

 

In short, assuming no other adjustments to basis, John Jr determines his basis as the sum of: (1) half the value of the property on the date John Sr. died plus (2) half the value of the property on the date Mary died. 

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The property at issue here is located in North Dakota.  When John Sr died the attorney filed a Joint Tenancy & Life Estate termination statement which shows Mary was the surviving joint tenant of the life estate.  Would the treatment of the basis for joint tenancy be the same as community property?  John Jr is a resident of Washington state.  Really appreciate the information.  Thanks!

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