Sale of Rental Property - Purchased for $1

[GodFather]

New client purchased her parent's home for $1 many years ago.  The parents remained in the home after the purchase but passed away a few years later.  Client ultimately rented the property and then sold it at the beginning of 2022.  Client never lived in the home.  Value of the home at date of death was $250,000.

There were no substantial improvements made to the home prior to it being rented.  Prior accountant entered $250,000 as the value of the home and depreciated it.  While rented, all repairs or improvements were expensed or depreciated.  Client never mentioned the $1 purchase.  What to do at this point?  This rental goes back ten years or so.  Thoughts please.  

[fredr]

i would think your clients basis would be the parents basis on date of gift. if there basis was $250000.00 at date of gift then that’s. what your clients basis is.

[IRonMaN]

Out of an abundance of curiosity, did they outright purchase the house for $1 or was that the token fee to process a life estate?  Since the folks stayed there until their death, it sounds like the potential for a life estate exists in this deal.

[TaxGuyBill · Accepted solution]

I agree with Jeff.  If the taxpayer did not benefit from the home until the parent died, it seems likely it is a Life Estate.  If it is a Life Estate, it gets the step-up in Basis at the date of death of the parents.

A $1 transaction fee for a home is not really a sale, it is just part of transferring the title.  If the taxpayer had used the home after that transfer, it probably would have been a Gift, in which case the Basis would be the Basis of the parent.  But as I mentioned above, it seems likely it is a Life Estate.

[GodFather]

I'm told they actually paid a $1 but it could have been a token fee as you indicate in your response. 

I appreciate everyone chiming in.