Academic journal article Journal of Accountancy

Transfer of Home Ineffective for Estate Tax Purposes

Academic journal article Journal of Accountancy

Transfer of Home Ineffective for Estate Tax Purposes

Article excerpt

Lydia Maxwell sold her home to her son in 1984 for $270,000. The son and his wife gave back a $250,000 mortgage, on which the son made yearly payments of 9% interest but no payments of principal. Maxwell forgave the remaining $20,000 of the purchase price in 1984, and in each of the next two years she forgave $20,000 of the mortgage principal. Her will forgave the remaining balance of the mortgage at her death.

Maxwell continued to live in the home until she died in 1986. In 1984 she signed a five-year lease at a monthly rent of $l,800--which about equalled her son's interest payments--and paid the agreed rent until her death.

The estate tax return reported the mortgage, valued at $210,000, as an asset but did not include the residence. The IRS claimed the property should be included in Maxwell's gross estate, at a value of $550,000, under IRC section 2036.

Section 2036 says that where a property is transferred, except in the case of a bona fide sale for adequate consideration (under which the individual retains possession or use of the property until death), the entire property's value is included in the decedent's gross estate. …

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