Sale of foreign property acquired through a life estate deed while life tenant (parent) still alive
My parents purchased a small apartment (in Bulgaria) for $5,000 in 1976. In 1997, they put it in my name (gifted it to me) through a life estate deed. According to that document, which I think is called a deed of donation of real property with a reserved life estate, my parents should retain their rights to use and occupy the property for the remainder of their lives and I should not have the right to use the property. I am their only child. My dad passed away in 2021. My mom continued to live in the home until July 2022, when she moved to the USA to live with me. Before leaving, she signed a document in front of a notary in which she declared that she gave up on her rights to use and occupy the property for the remainder of her life. She did that so I could sell the property. She is 79 years old now, and I am taking care of her. In December of 2023, I sold the apartment for $60,000. The sale deed states my name as the seller. My mom’s name does not appear in that document, and she was not required to sign anything. The buyer is not related to our family. I lived in that apartment only when I was a child, and it has never been used as a rental property. Between 2000-2004, my parents and I invested some money on improvements such as air-conditioning, kitchen and bathroom modernization, hardwood flooring, insulation of walls, storm windows, etc. Unfortunately, I don’t have the records/invoices to provide as evidence. I did not owe any taxes on the sale in Bulgaria.
1) How do I report the sale of that apartment? Do I qualify for the remainder interest exclusion (buyer isn’t a related party, and I haven’t previously sold an interest in that home and have never taken any exclusion)?
2) Is this considered a long-term capital gain?
3) Which date is considered as the date acquired: a) the date when my parents purchased the home in 1976; b) the date when they put it in my name through a life estate deed in 1997, or c) the date in 2022 when my mom signed the document giving up on her rights to use the property for the remainder of her life?
4) What is the cost basis to me as the seller?
Answers
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Thanks for using FreeTaxUSA.
1.) Since the property was given over completely to you, this would be a capital gain. The exclusion only applies if you lived in the home for 2 of the last 5 years that you owned the home.
2.) The holding period for gifted property starts from the date the property was originally purchased. This is a long term capital gain.
3.) Since long-term means just more than one year, you could use the date of purchase, the date of the initial gift in 1997, but I would not use the 2022 date when your mother made the final gift so that you can sale the property unless that date was more than one year before the sale date.
4.) The cost basis of a gift is the amount originally paid for the property. It sounds like that amount would be 5,000 dollars.
There are a couple of other things to be aware of since this is the sale of foreign real estate:
1.) I assume you have already done so, but you need to convert all amounts into USD as of the date of purchase and the date of sale using the spot rate.
2.) If the proceeds were deposited into a foreign bank account, you may have a Foreign Bank Account Report (FBAR) requirement, and you may have a requirement to file a Form 8938 with your tax return.
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Thank you for your response! I really appreciate it.
"Since long-term means just more than one year, you could use the date of purchase, the date of the initial gift in 1997, but I would not use the 2022 date when your mother made the final gift so that you can sale the property unless that date was more than one year before the sale date."
— My mom made the final gift on 07/19/2022. Until that date, I did not have any right to use, control, or sell the property. I sold the home a year and a half later, on 12/04/2023.
Can I use the FMV at that time (July 2022) as my cost basis? The FMV in July 2022 and December 2023 was much higher, aproximately $90,000, than the sale price ($60,000) but we weren't planning on selling the property at that time (2022) since we weren't quite sure if my mom at her age would be able to adjust well living with me in the US. We made that decision in November 2023, I put it on the market and sold the home as soon as my agent found a buyer.
The proceeds were deposited directly into my US bank account, so I assume I should not have to file an FBAR form and Form 8938. I do not have any foreign bank accounts.
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Pub 551 states on Page 9, "If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift."
In your case, it sounds like you will need to use your mother's basis in the home as your basis. This would be the original purchase price from 1976 plus the cost of any improvements to the home or property.
