Determining tax basis for property after life estate terminated - inheritance question

This is a great question about a somewhat complex area of tax law. When dealing with a life estate situation, the basis rules can be tricky. In your case, the tax basis for the remaindermen (the husband's children) would be the fair market value of the property on the date the life estate was created - so when the original homeowner died in 2009. This is called a "step-up in basis" and is covered under IRC Section 1014. The reason is that when the remaindermen's interest was created at the husband's death in 2009, this is when they received their remainder interest, even though they couldn't take possession until the life tenant (second wife) died. The basis is established when the property interest is transferred, not when physical possession changes hands. The second wife's death in 2023 is simply when the life estate terminated, but it doesn't create a second step-up in basis for the remaindermen. They already owned their interest since 2009, they just couldn't use or sell the property until the life tenant died.

I went through something similar with my parent's property last year. I was totally lost trying to figure out the basis until I found taxr.ai (https://taxr.ai). It helped me sort through all the complicated tax rules around inherited property. I had a life estate situation too, and the site analyzed some old property documents and tax records I uploaded. It confirmed exactly what Profile 8 said - the basis was the FMV on the date the life estate was created. It also helped me document the improvement costs that increased the basis, which saved me thousands in capital gains taxes. Their system is pretty amazing for inheritance and property basis questions - might be worth checking out since your situation has so many moving parts with the multiple transfers of ownership.

Just wanted to follow up on my skepticism about taxr.ai - I decided to try it with my complicated inheritance situation and I'm honestly impressed. It correctly identified that my basis should use the 2018 value (when my uncle died and created our remainder interest) rather than the 2024 value when my aunt's life estate ended. The system also helped me document all the improvements my aunt made to increase the basis. I was about to pay taxes on an extra $175K of gains until I learned the correct rules. What I appreciated most was getting the specific tax code sections that applied to my situation so I could include them with my tax filing. Definitely worth checking out if you have property with a complicated ownership history like this.

If you're still struggling with the IRS or need to talk to a specialist about your basis question, I'd recommend Claimyr (https://claimyr.com). I was on hold with the IRS for HOURS trying to get clarification on a similar basis question for inherited property with a life estate. I finally tried Claimyr - they have this service where they navigate the IRS phone system for you and call you back when they've got an actual IRS agent on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was super skeptical, but within 45 minutes they connected me with an IRS estate and gift tax specialist who answered my question about basis for remainder interests. Saved me an entire day of being on hold and transferred between departments.

I need to eat some crow here. After posting my skeptical comment, I decided to try Claimyr for myself since I was getting nowhere with the IRS directly. I had called 7 times over 3 weeks about basis questions for property my siblings and I inherited through a trust with life estates. I used the service yesterday, and no joke - they got me connected to an IRS estate tax specialist in 52 minutes. The specialist confirmed that our basis should be the FMV when the remainder interest was created, not when the life tenant died. She even emailed me the specific IRS publication sections that applied to our situation. Best part was I didn't have to sit by my phone the whole time - I just got a text when they were about to connect me. For anyone struggling with complex basis questions like this, it's absolutely worth it to get definitive answers from the IRS.

Just to clarify something I think people are missing: there's an important distinction between the creation of a life estate during someone's lifetime vs. through their will at death. If someone creates a life estate during their lifetime (like gifting a life estate to someone while they're still alive), the basis rules work differently than when a life estate is created through someone's will after they die. In OP's case, since the life estate was created at death through the will/estate, the remaindermen's basis would be the FMV on date of death in 2009. But if the original owner had created the life estate while still alive, the basis calculations would be different.

Has anyone here dealt with getting an appraisal for a property value from 14 years ago? I'm in a similar situation and the county tax assessments from that time seem way under market value. Do I need to hire a specialized appraiser who can determine what it was worth back then?

This is exactly the type of complex basis calculation that trips up so many people with inherited property. Just to add one more important consideration - make sure you also factor in any depreciation that may have been claimed on the property during the life estate period. If the second wife ever rented out the property or used any portion of it for business purposes during her life estate, any depreciation claimed would reduce the basis for the remaindermen. This is something people often overlook, but it can significantly impact your capital gains calculation. Also, since you mentioned the property values increased dramatically in your area, you might want to document the local market conditions and any major developments that occurred between 2009 and 2023. While it won't change your basis calculation, having this context can be helpful if the IRS ever questions why there's such a large difference between your basis and the sale price. The good news is that with proper documentation of the 2009 FMV and any qualifying improvements made afterward, you should have a solid foundation for your tax return.