Academic journal article Journal of Accountancy

Transfer of Home Ineffective for Estate Tax

Academic journal article Journal of Accountancy

Transfer of Home Ineffective for Estate Tax

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 note, on which the son paid yearly interest of 9%, but no principal. Maxwell forgave the remaining $20,000 of the purchase price in 1984, and in each of the next two years forgave $20,000 of the mortgage principal amount. Her will forgave the balance of the mortgate remaining at her death.

Maxwell continued to live in the home until her death in 1986. At the time of the conveyance, she had signed a five-year lease at a monthly rent of $1,800--which about equaled her son's interest payments. Maxwell paid the agreed rent until her death.

The estate tax return reported the mortgage note, valued at $210,000, as an asset, but did not include the value of the residence itself. The IRS claimed the property should be included in Maxwell's gross estate--at its 1986 fair market value of $550,000--under IRC section 2036.

Under section 2036, when a decedent makes a property transfer--except in the case of a bona fide sale for adequate consideration, under which the decedent keeps possession or use of the property until death--the value of the entire property is included in the gross estate. …

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