Q:

Subject: Older client sells home and retains right to live in it until death or abandoned

I have an older client who sold her home to her neighbor below fair market value because she retained the right to live in it rent free until she died or abandoned the property (nursing home for example).  We are now trying to see if she can take the $250K exclusion on the sale.  It was arms length in that the buyer paid less and can't take possession until a future unknown event.  The neighbor went through a regular escrow. 

My feeling is that the "discount" was an arms length transaction with a lot of give and take before a price and terms were agreed on.  The tax person is saying that since she did not sell her entire interest (retained a right to live there) that the entire gain is capital gain.

Thoughts?  I have been doing research and have not found anything on point.  Most retained life interest data refers to 706 preparation.

Mahalo,

A:

As long as her neighbor wasn't related to her, it seems that she can utilize the Section 121 exclusion, as described in IRS's own Pub 523.   

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.

Exception for sales to related persons.   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations."

The sale that you described sounds exactly like the normal definition of a remainder interest, so it should be eligible for the exclusion, as long as the neighbor wasn't a relative.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you for your quick reply. 

Thanks Again

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 12:11:00 PM Send this post: