Legal Question in Real Estate Law in New Jersey

Re: Sale of property with life estate

The problem is more complex than you probably think. You should consult a tax accountant not only for an answer to your question but to be sure that you and your father both file your taxes consistently. Generally, if this is done, the IRS will not object. A tax lawyer is a less appropriate choice because there is not legal dispute or issue. Here is my take for what it is worth:

The realty transfer tax is normally paid by the seller. The State really doesn't care how you and your father divide it so long as it is paid.

For capital gains purposes, your basis in the property is the value that the remainder interest had in 2007 which likely will be established on actuarial principles based on your father's age at that time. Your gain is determined by what you realize by the sale less your basis. Your father's interests are the balances, and his gain is likewise determined by what he gets less his basis (in the life estate).

The kicker is that your father should have paid gift taxes in 2007 when he gave you the remainder interest. That introduces the complexity, because the treatment of your father's transaction depends on how when the gain on the remainder interest is realized and how it is calculated. There are at least two obvious ways to do that. I can't tell you which one the IRS allows, but a tax accountant should be able to.

In the alternative, you may get some help from searching the IRS Regulations or the IRS web site.

See also: http://info.corbettlaw.net/lawguru.htm