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Transfer of home ineffective for estate tax purposes.

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.

Result: For the IRS. Section 2036 applies to the transfer, and the home must be included in the gross estate. (However, the mortgage amount is subtracted from the gross estate.) Regardless of the form given to the transaction, in substance Maxwell transferred her home to her only heir with the implied understanding she could live in it until her death. The transfer was not a bona fide sale. The mortgage note had no value, since the parties did not intend for it to be paid. Further, the lease was merely part of the attempt to make the sale appear bona fide.

* Maxwell Est., 98 TC no. 39.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1992
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