Asset Protection Via 1031
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?
The 1031 exchange by itself does not provide for any type of asset protection, so I'm not sure what you meant in the title by Asset Protection Via 1031. It does allow you to reposition your portfolio without incurring any income tax consequences.
[addsig]
I am looking at the paperwork, it is am INDENTURE between my mother (party of the first part) and us (party of the second part) in consideration of $10 herby grant and release to the party of the second part ... Witnesseth: my mother grants and reserves unto herself a life estate for and during her life in the premis.
The asset protection that I am referring to is the Medicaid and step-up-basis of asset that this "union" provides.
You should probably consult a licensed tax professional and estate attorney on this one.
It is my understanding from the information you provided, that your mother gave you the house. Your basis in the property is the same as her basis in the property.
To clear title, your mother will have to relinquish her life estate. The attorney will know how to do that.
As far as Medicaid is concerned, they generally do not look at an individual's primary residence IF the individual has signed a notice of intent to resume occupancy at some future date. Your estate attorney should also be able to advise you in this area too.
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On 2004-11-10 12:55, NewKidinTown2 wrote:
You should probably consult a licensed tax professional and estate attorney on this one.
It is my understanding from the information you provided, that your mother gave you the house. Your basis in the property is the same as her basis in the property.
To clear title, your mother will have to relinquish her life estate. The attorney will know how to do that.
As far as Medicaid is concerned, they generally do not look at an individual's primary residence IF the individual has signed a notice of intent to resume occupancy at some future date. Your estate attorney should also be able to advise you in this area too.
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From the CPA Journal - http://www.nysscpa.org/cpajournal/2000/0200/f322000.html
* Separation of an asset into two interests through the creation of a life estate in which an elderly couple retains a life interest in property (such as the family homestead) with the remainder to their children upon the death of the second spouse. This strategy prevents the full value of the remainder interest from being considered for Medicaid consideration after three years have elapsed. The creation of this type of interest does not generally preclude the continued availability of real property tax exemptions for a personal residence (e.g., elderly, military, and New York's STAR exemption). In addition, the remainderman will receive a stepped-up income tax basis upon the death of the life tenant/s in contrast to a carryover basis had the transfer been an outright one.
Quote:Separation of an asset into two interests through the creation of a life estate in which an elderly couple retains a life interest in property (such as the family homestead) with the remainder to their children upon the death of the second spouse.From the information in your post, you said that your mother deeded you the house and retained a life estate. This is a gift and your mother's basis in the property becomes your basis.
This is a little different from a life estate created by a will in which title to the property is held in a testamentory trust and distributed to the heirs upon termination of the life estate. In this case, stepped up basis would apply.
Again, you need to consult an estate attorney to sort all this out.
Well I did what I should have done in the beginning. I called the IRS and after directing me to someone who handles 1031s he said "no problem" as long as I follow the guidelines. I feel that I will be able to retain the stepped up basis for I feel that the "spirit" of the 1031 transfer should not disallow the steped up basis that a retained life estate arrangement provides. Anyway I have three callbacks pending from an Elder Care, Tax and Real estate attorneys. I also have a buyer waiting to hear from me.
According to
http://www.premack.com/columns/1999/990312.htm
He writes
...
What is the best thing for you to do? I suggest that you look into a "life estate" deed to your son. In it, you give him a remainder interest in your home, and you keep the right to occupy and use the house. When you die, his remainder interest automatically blossoms into full ownership.
The life estate arrangement legally gives you the best of both worlds. You still own the home while you are living, so you keep all your local tax reductions. He becomes full owner upon your death, so he gets the stepped-up basis and avoids some (or all) capital gain taxes when he sells. And the whole transfer happens without probate, so it can save time and money.
Well, now you have two questions to answer.
Have you been granted full title? You say that you have. If so, then your basis is the basis your mother had when she gave you the house. Stepped up basis does not apply because there is no remainder interest to transfer at your mother's death.
If you are truly in possession of a remainder interest, then you do not have title -- perhaps, instead, title is vested with a living trust. If this is the case, then you do not yet own the property and your ability to initiate a 1031 exchange is in question. At the time you are granted full title, then you receive a stepped up basis in the property. This happens when your mother passes on, not before. When it does happen, you don't need a 1031 exchange to defer taxes.
I most strongly advise that you get competent legal counsel involved in answering these questions for you.
Joint tenants in common will work.
How the buyers want to hold title is their problem, to be addressed by their attorney.