Life estate farm reaquired after life tenant's death- basisclients

[Denise Taxes 54 years]

My client gave her brother a life estate in her farmland she inherited from her mother in 2013. Is is farmland used for orchard nut production, farm rental and soon to be residential rental. The life estate gave brother all income and control until death 11/1/23. My client reaquired the property subjected to a complete step up in basis as far as I understand. She had a date of death appraisal. But is is pretty vague because the history of the walnut production died with her brother and his widow is MIA.

The orchard was planted by my client's father 26 years ago and is mature and near the end of productive life. I can't find anything on how to place the depreciation value of this 50 acre orchard. It is being leased out under a production of net income arrangement. 

The 162 acre property had been seriously neglected for years due to health and  pure neglect. His widow took the earnings and neglected the maintenance. She's $500,000 in already against $65,000 of income. Any help, code, Revunue ruling or case history would be appreciated. I've done farms many years ago (40) and know the basics.  Will pay for consultation if needed. 

[TaxGuyBill]

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@Denise Taxes 54 years wrote:

My client gave her brother a life estate in her farmland she inherited from her mother in 2013.

The life estate gave brother all income and control until death 11/1/23.

My client reaquired the property subjected to a complete step up in basis as far as I understand.

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I don't really understand this Life Estate.

Your client inherited the land in 2013.

A Life Estate would generally mean that she changes the title to her brother but SHE has rights to all income and expenses until SHE dies.  Not him.  And the step up applies if SHE (the giver, with rights to the property) dies.  That is what is confusing.

Did she merely give him a gift of the land, and she inherited it from him when he died? 

[sjrcpa]

"She had a date of death appraisal."

It should have valued the orchard. If it didn't, she can probably go back to the appraiser and have it done.

But, agreeing with Bill, the facts don't make sense.

[qbteachmt]

I'm also trying to follow.

"My client reaquired the property subjected to a complete step up in basis as far as I understand"

You can't reacquire something you already owned. If it was her property and he was given "right to live there and operate it" then she still owned it. You don't inherit it because it was yours all along.

Was the property bifurcated? You mention 50 acres and also 162 acres.

How much longer is that production lease? If there is a lessee, wouldn't they have the production history? How would that die with the brother? Are there no records, not even filed with the County or State Ag?

It seems maybe the brother did the tax reporting on the property and not your client?

Once you get that clarity, it might help to know exactly what you are trying to solve for.

[BobKamman]

It makes perfect sense to me.  Did you miss the part about "the history of the walnut production died with her brother and his widow is MIA"?  Mom leaves the  orchard to Sis because neither of them like Bro's wife and the worthless stepchildren.  But Sis doesn't want to kick Bro off the property, he's the one who knows how to manage it, so she tells him "you can live there the rest of your life, but when you're gone so is Floozy.  I get the property back for myself, to keep in the family."  Because that's probably what Mom told her to do.  

So I'm not sure why there would be a step-up in basis.  She's owned the property since 2013.  If she had given the brother a 10-year lease on it, her basis would have remained the same.  Except who was entitled to depreciate those trees?  Too early in tax season to consider such squirrelly questions.  

[Denise Taxes 54 years]

Except she gave up sole ownership of the property the day she agreed to give him the life estate, making her ownership tenants in common with her brother and a remainderman (beneficiary) at his death. It's the death thing that gives her the step up. If brother were kicked out due to violating the terms, which he did, before death, the life estate being terminated, my client would have the step up she got from Mom's DOD and not her brother's DOD ten years later.

This is what  her estate planning attorney told me. "In simple terms, a remainderman is the person who will inherit a property or asset upon the termination of a life estate. A life estate is a form of joint ownership that allows one person (the “life tenant”) to remain in a house until their death, when it passes on to the remainderman.The entire property is inherited because she gave aware the entire right to use it and enjoy its income. The step up is only triggered by death. 

We could both be wrong. After 54 years at this, I'm right less often than I used to be.

Denise

[BobKamman]

"the day she agreed to give him the life estate, making her ownership tenants in common"

No, that is not what creates "tenants in common."  For that she would have had to give him half the property outright, and then a life estate in the half she kept.  And his estate would still own the other half, with presumably the widow claiming some spousal rights to it.  

She could have put the property in joint tenancy with right of survivorship, but then it would be a race to the graveyard and Bro might have outlived her.  The estate planning attorney (I'm one of those, too) is simplifying things too much by calling life estate "a form of joint ownership."  It's more like, "a way to accomplish some of the benefits of joint ownership, without having to create one."

[Denise Taxes 54 years]

I misspoke. Her attorney did not say "joint" ownership. He said a form of ownership. Correction. There were three parcels initally from mom's estate. Two outright to each separately and the subject property was deeded as to a 1/2 undivided interest to my client, Linda and 1/2 undivided interest to her brother Jeff. This I understand as tenancy in common and was used specifically to prevent Jeff's widow from ever having any ownership if Linda died before Jeff, then Jeff, leaving the widow owning the property with Linda's trust beneficiaries. This was deeded this way as to exclude the rights that JTWROS has. Mom hated the widow as much if not more than my client did. The life estate was  written ASAP after an agreement could be made. Jeff had quit paying his share of expenses as the widow was controling the money. Then a new deed was recorded as follows: Jeff, a married man as his sole and separate property, as to a life estate, and the remainder estate to Linda, an unmarried woman.  

So because he had original interest, albeit an undivided half at the time of the life estate was created, should not the remainderman, Linda (beneficiary) gets the step up as to the entire basis just as she would have had the ownership been JTWROS?

I'm an old CFP®. I've asked my two best CPAs here, one of which is a tax attorney, locally for an opinion. They both told me. Yeah. I don't do life estates. Nobody wins.

That's not always true. The widow, when Jeff lost his mental capacity, had the ag well capped off on this subject property, dug one on the property Jeff owned outright (which she would inherit) and piped water from it to the fields on Linda's land in clear violation of the life estate. The diminished value is estimated close to $1,000,000 or more as water becomes more precious. Linda's investing $300,000 to did a new hole, fight Environmental Health and the USGS for an EIP which may or may never come before she can dig.

Plus the bonus of suing her former sister in law for damages, wasting, entering into unlawful contracts with POA acquired thorugh a young unscrupulous attorney willing to ignore the fact that Jeff had severely diminished capacity. This was done after the long time family attorney said no to the POA.

Best Linda can hope for is a lien against the property with the well the widow has inherited and still is delinquent on paying taxes. Judge will not have a lot of sympathy. She walked away and never invoked her rights for annual inspections and examination of records. Oh the life of a tax professional....

[TaxGuyBill]

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@Denise Taxes 54 years wrote:

was deeded as to a 1/2 undivided interest to my client, Linda and 1/2 undivided interest to her brother Jeff.

Then a new deed was recorded as follows: Jeff, a married man as his sole and separate property, as to a life estate, and the remainder estate to Linda, an unmarried woman.  

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Jeff had the Life Estate, and gave it to Linda.  So, yes, there is a Step-Up when Jeff died.  Your original post implied the opposite, which was confusing us.

However, it seems like you are also saying before the Life Estate that 50% belonged to Jeff and 50% to Linda.  What happened to Linda's 50%?  If she owned 50% (besides the remainderman ownership), that portion would not get be stepped up.

[Denise Taxes 54 years]

Ok. Because it is a husband and a wife who own property jointly in community property states that get a step up on 100%. This case property is valued at half mom's date of death (September 2010) and brother's date of death November 1, 2023. 

Thank you. 

Denise

[BobKamman]

Mom dies. They each own half as tenants in common (so Bro’s share goes to his widow unless he directs otherwise). Then a dispute arises over paying expenses. So he deeds the remainder interest in his share to Sis. He keeps the life estate. What does she do with her half? Nothing? She still owns it, so basis still goes back to FMV at Mom’s death. As part of the agreement, did she assign him all the income from her half? Or has she just not been enforcing her rights to it, and therefore not reporting it on her returns?

Your situation is covered by one of these two examples, from the Iowa State University Center for Agricultural Law and Taxation:

If a decedent had an interest in a life estate at death, the property does not receive a step up in basis unless the life estate was a retained life estate granted by the decedent. In this case, the life estate property remains in the decedent’s gross estate.

Example: When Harry died, he had a life estate in a farm that was granted to him by his grandfather’s will. At his death the farm passes to Sherry, who held a remainder interest. After Harry’s death, Sherry’s basis in the farm will be the FMV of the farm at the time of Harry’s grandfather’s death. This is because the farm, in which he had a granted life estate during his life, was never part of Harry’s estate.

Example: When Harry died, he also had a life estate in a house. This life estate arose when he deeded the house, which he originally owned, to his children, retaining a life estate for himself. In this case, the basis in the hands of Harry’s children will be the FMV of the house on the date of Harry’s death. This is because the house, in which he had a retained life estate, is included in Harry’s estate.

https://www.calt.iastate.edu/article/gifting-selling-or-inheriting-question-basis 

But really, this isn’t a tax question. It’s the plot of an HBO miniseries.