Under the current tax law, the value of any real property owned by a taxpayer will be included in the calculation of the taxpayer’s gross estate, even though the property itself will transfer ownership upon his death. Selling your remainder interest in the property, which is the right to own the property once you die, may be a way to avoid including value of the property in your gross estate.
Will Selling This Interest Reduce My Estate Tax?
Since estate tax is a tax that is imposed on a person’s gross estate, a way to reduce the estate tax is to reduce your gross estate as much as possible.
If you sell your remainder interest for "full and adequate consideration," you will not need to include the value of the property in your gross estate at your death. Full and adequate consideration usually is the fair market value of the remainder interest; this number can be very big or very small, depending how many more years the seller is expected to live.
For example, P decides to sell his remainder interest in his house (worth $200,000) for $55,000, the fair market value of the remainder interest. P retains the right to possess the house until he dies. P dies 5 years later, when the house is worth $550,000. P’s gross estate will not include the value of the house at the time of remainder interest sale or the subsequent appreciation.
Do I Have to Pay Taxes on the Sale?
Yes. As with the sale of any property interest, you may have to pay income tax on the sale of the remainder interest. If you make a gain from the sale (i.e. the sales price exceeds your basis in the property), then you will probably have to pay taxes on the gain. If the property is a capital asset, then the resulting gain will be taxed at a preferential capital gains rate.
Selling your remainder interest in an installment sale is a way to avoid having to pay taxes on the entire amount of gain all at once. However, installment sales often include interest payments, which might increase the total amount of income that the seller needs to pay tax on.
Do I Need an Estate Attorney?
If you have questions or problems with trying to figure out how to reduce your gross estate or estate taxes, you should consult with an estate attorney. They can help you create the right plan for the distribution of your estate upon your death, including assisting you with figuring out how your estate will be affected by estate taxes.