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Ask the Expert: Taxes on an inherited home

My mother transferred ownership of her home to me and my siblings in 2005, but maintained the right of lifetime tenancy and paid all the bills for this home until she died in 2012. We're now selling it. What will be our tax liability on the sale proceeds?  

You and your siblings will only owe taxes on the increase in the value of the house since your mother's death. If it was then worth $1 million, for example, and you sell it for $1 million, you won't owe any taxes on the sale proceeds. If you sell it for $1.8 million, you'll owe taxes on $800,000.

Let's start with two well-known tax rules: If I transfer my house to you during my lifetime, when you sell it you're taxed on the increase in its value since I originally bought it. In other words, you're taxed exactly as I would have been. But if I leave you my house in my will, you inherit it at its market value at the time of my death.

Your situation is a less well-known third scenario. Your mother transferred the house to you, but kept the legal right to live there. In tax jargon, she retained a life estate in the house. As a result, the full value of the house remained in her taxable estate, says Alan E. Weiner, a Plainview tax accountant — and a house included in a decedent's estate is inherited at its fair market value at the time of the decedent's death. This is true even if your mother's estate didn't incur a tax, he adds. (Tax professionals: See Section 2036 (a) and Section 1014 of the Internal Revenue Code.)

The bottom line

A house in which the decedent retained a life estate is inherited at its market value.

More information

irc.bloombergtax.com/public/uscode/doc/irc/section_2036

law.cornell.edu/uscode/text/26/1014

TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday, 6 Corporate Center Dr., Melville, NY 11747, or email act2@newsday.com. Include your name, address and phone numbers. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own consultants for your specific needs.

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