Living In A Tax Deduction


You have probably heard about how Hugh Hefner sold the Playboy Mansion but retained the right to live there until he dies. And you might have read that Zsa Zsa Gabor did something similar since to her famous estate, leaving her (ninth) husband, Frédéric Prinz von Anhalt, homeless when she died. But did you know that quite a few non-famous people are also selling or gifting away their home while keeping the right to live in it?

What is a “life estate?”

Selling or giving away your home while maintaining the right to live in the home until your death gives you what is known as a “life estate.” The buyer or gift recipient gets what is called a “reminder” which will convert to full title at the time of your death without having to go through probate.

Why are life estates becoming more popular?

There are two basic scenarios that make giving away or selling your home with a life estate attractive. It is useful if you need cash, and it can be a great tax deduction.

First, if you need cash now, and your home is your most valuable asset that can be easily sold, selling your home with a life estate can be a good option. You can structure the sale so that you get the full price now, or opt for a down payment and periodic payments until the purchaser has paid full price.

It is important to keep in mind that keeping a life estate will decrease the value of the property. Since life estates are relatively rare, it can be difficult to predict how much keeping a life estate will impact the sale price of the property until it is actually listed.

Zsa Zsa Gabor’s life estate is a good example of one that was created because the current owner reportedly needed cash. It also shows how keeping a life estate can make a property more difficult to sell.

The second scenario that makes creating a life estate attractive is when gifting a house can provide a needed tax deduction. If you are selling a business or some other asset that has appreciated in value, a large charitable donation can be a good way to cushion the tax blow that comes along with doing so. Gifting your home to a charitable organization is one way to make such a large donation.

If estate taxes are a big concern for you, you might also consider gifting your home to a Qualified Personal Residence Trust or a QPRT (pronounced “cue-pert”). When done properly, this can freeze the value of your home for estate tax purposes and pass your home on to a relative.

No matter why you are selling or gifting your house, or how you structure the sale, it is critical that the contract include provisions governing taxes and repairs. It is in the benefit of both parties to the transaction to see that the house is kept in good shape structurally and financially until the full title passes to the new owner.

Brian Chew, the managing partner of OC Wills & Trust Attorneys, has extensive experience in the areas of estate planning, asset protection planning, business succession planning, long-term care planning, and veterans’ benefits. By devoting his practice to estate planning matters, he has founded a firm that strives to provide exceptional service to their clients by working closely with individuals and their families to create comprehensive and customized estate plans. For the past twenty five years, Brian has served thousands of clients in the matters of estate planning, wills and trusts. If you have any questions about this article, you can reach Brian Chew here.