Mom left us the house, what are the taxes when we sell?

My mother kept a life estate in her house in 1996, naming her seven children on the deed along with herself. She recently died. We plan to sell her home. What if any taxes will we owe at the time of the sale? 

You'll only owe taxes on any increase in the value of the house since your mother's death. In other words, if it was worth $1.5 million when she died, and you sell it for $1.5 million, there's no tax on the sale proceeds. If you sell it for $1.6 million, you'll owe taxes on $100,000.

Your mother transferred her house to you but kept a lifelong right to live there, known as "a life estate." This type of transfer isn't unusual.

When it's done correctly, the children inherit the house for its fair market value, says Alan E. Weiner, a Melville tax accountant. Here's why: Section 2036(a) of the Internal Revenue Code says that when someone retains lifetime use of property, its total value is included in her taxable estate when she dies.

And Section 1014 of the Code says that your heirs inherit property in your estate at its fair market value. (I include the Code citations because your question comes up quite often, and even tax accountants sometimes answer it incorrectly.)

There's one extra wrinkle here: If your mother died in 2010, you have the option to use an alternative set of tax rules which apply only for that year. I'll discuss them in next week's column. But the rule that I've described here is likely to work best for you.

The bottom line. When you inherit a house from someone who retained a life estate in it, you receive it at its fair market value at the time of the previous owner's death.

For more on this topic, click here to go to Lynn Brenner's blog.

Click here to find a New York Law Journal article on life estates by Lawrence Eric Davidow.