Q:

Subject: sale of personal residence

 

I found your article re Primary Residence sales to be very informative.  I have read several of your articles, and they have helped me a lot.  Especially in the area of 1031 exchanges. 

 

I do, however, have a question that I cannot find an answer to in the research I have done.  Perhaps you can help, and probably know the answer off the top of your head. 

 

Can you sell your personal residence and retain a life estate in the property and still qualify for the $250,000/$500,000 exclusion?  I don't know any Arkansas state law but in Mississippi with a life estate you are no longer the legal owner of the property, but you still have the use of the property for the rest of you life.  Any help you can give me here will be greatly appreciated. 

 

Thank you very much!

A:

My first impulse was that I thought I had recalled that the sale had to be for the entire interest in the property; but I checked my reference sources and discovered that's not the case.

Here's the pertinent section from IRS Pub 523, which you can see online here.

"Sale of remainder interest.   Subject to the other rules in this publication, you can choose to exclude gain from the sale of a remainder interest in your home. If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately."


Since the sellers in your scenario are retaining the use of the property for the rest of their lives, a buyer would be purchasing a remainder interest that would give him/her complete control over the property only after the sellers pass away or relinquish their life estate.  As the IRS info says, if the latter happens and the sellers later decide to move on and sell their life estate to the original buyer, that would not be eligible for the tax free exclusion.

Retaining a life estate does add a lot of complications with the valuation of gifts and charitable donations; but seems to be much less complicated in relation to home sales.

I hope this helps.  Thanks for writing and helping me clear up this issue in my own mind.

Kerry Kerstetter

Follow-Up:

Thank you very much!

 

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/01/2006 11:26:00 AM Send this post: