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Tax on deferred inheritance
My wife received proceeds from the sale of her mother's principal residence 7 years after her mother's death in 2000. The mother's legal will, however, included a provision that the mother's boyfriend have use of the residence until his death. His death occurred 4 years later, in 2004. The resulting sale (in 2007) was at a market price greater than the FMV at the time of the mother's death.
Since the house could not be disposed of during the boyfriend's life and occupancy, is the calculation of the step-up basis of the house deferred until 2004. Is my wife's tax burden calculated on the increase in market value from 2004 or 2000? For example, FMV 2000 = $100,000 FMV 2004 = $125,000 Sell Price 2007 = $150,000 Is the taxable appreciation $25,000 or $50,000? |
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The taxable appreciation is $50,000.
The provision that the boyfriend have use of the residence (presumably rent-free) did NOT change the fact that the residence title passed to your wife's name. Hence, the stepped-up valuation occurred at the date of her mother's death. The ONLY way you could use the 2004 date of death of the boyfriend was if her mother willed the property to him, then he subsequently willed the property to your wife in HIS will. Since that did NOT happen, you are stuck with the lower stepped-up value from year 2000. |
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