1031 Exchange Of Life Estate
My mother deeded her three family house in Brooklyn NY over to my brother and myself in 1995 while reserving for her a Life Estate. She has not lived in the house for the last 10 years and has managed the house for the past 20 years. She is 82 and now doesn't want to manage it anymore. Since the house is quite a distance from both me and my brother we are considering exchanging the house via "Like Kind Exchange" (1031). We would like to keep the same arrangement i.e. and my brother and I as tenants-in-common and my mother retaining a Life Estate. Can this be done? Upon the death of our mother would we obtain the house with the stepped up basis to FMV?
It sounds like you and your brother already own the house because she deeded it to you in 1995 and your mother has merely retained a life estate so that she has the right to live there. If my understanding is correct, you and your brother would not "inherit" the property upon her passing because you already own it. The life estate would be eliminated upon her passing. If she concurs with the sale, she can remove the life estate so that you would be able to proceed with the sale of the house. I am not an expert in the area of life estate, so I would verify all of the above with your tax advisors.
As to the 1031 exchange question, here are some other questions first. Who actually receives the rental income? Who has been reporting the property and related income and expenses on their income tax returns? How has it been reported?
[addsig]
The house is really owned by my mother in the sense that all income and expenses flow through her. We assume ownership at the stepped up basis when she passes away. That is the purpose of the Life Estate - the house flows to us "through the estate" when she passes away - that is the logic of the stepped up basis. This methodology protects her assets from Medicaid after the 36 month lookback.