ABA Family Legal Guide

The Rights of Older Americans

Housing and Long-Term Care Options

Home Equity Conversion

What if I sell my house and keep a life estate?

In a life estate, or sale of a remainder interest plan, you sell your home to a buyer, but keep the right to live there during your lifetime. The buyer pays you a lump sum, or monthly payments, or both. You are usually responsible for taxes and repairs while you live in the house, but you pay no rent. At your death, full ownership passes automatically to the buyer. This arrangement is most common within families, as part of an estate plan. As with a sale-leaseback, it might be difficult to find an outside investor.

There also may be a tax disadvantage to this arrangement. If you sell the house to a family member, but keep a life estate, the tax basis in the property for the family member will be the same as your basis in the house, which is the amount you paid for the house plus the cost of any improvements you made in the property--let's say $125,000. This amount typically will be considerably lower than the stepped-up basis (that is, the market value of the property at the time of inheritance--let's say $225,000) to which your heir would be entitled if he or she inherited the property upon your death. If your heir later sells the property, he or she will have to pay a capital gains tax on the difference between your basis and the amount for which the property was sold--or $100,000, assuming the property sells for the market price at the time of your death.