What is a life estate deed?
A life estate deed splits ownership of one property into two pieces that exist at the same time: a present interest that lasts for someone’s life and a future interest that takes over when that life ends. The most common version is a parent deeding a property to a child while keeping a life estate, so the parent stays in control for life and the child takes title at death without probate.
The life tenant can live in the property, rent it out and keep the income. The remainderman has a vested future interest that the life tenant can’t take away on their own. That last point is what separates a traditional life estate from an enhanced life estate deed, often called a Lady Bird deed.
Life tenant vs remainderman: who owns what?
The life tenant owns the right to possess and use the property today, and the remainderman owns the right to the whole property later. Neither one owns the full fee simple title alone while the life tenant is alive.
| Question | Life tenant | Remainderman |
|---|---|---|
| Who lives in or controls the property now? | Life tenant | No right to possession until the life tenant dies |
| Who keeps the rent from a rental building? | Life tenant | Nothing until the life estate ends |
| Who pays property taxes, insurance and routine repairs? | Usually the life tenant | Usually not, unless agreed |
| Who claims depreciation? | Life tenant, under Section 167(d) | No depreciation while the life estate lasts |
| Can they sell the whole property alone? | No, only the life interest | No, only the remainder interest |
| What happens at the life tenant’s death? | Interest ends | Becomes the full owner |
Traditional life estate vs enhanced life estate (Lady Bird) deed
An enhanced life estate deed lets the owner keep a life estate and also keep the power to sell, mortgage or revoke without the remainderman’s consent. With a traditional life estate deed, the remainder interest is locked in once the deed is recorded, so the remainderman has to join any sale.
Not every state recognizes the enhanced version. Vermont wrote it into statute in Title 27, Chapter 6, which defines an enhanced life estate deed as one where the grantor reserves a life estate and the right to convey, and says the grantor can sell without joinder by, consent from or notice to the grantee. Texas recognizes Lady Bird deeds under its common law, according to the Texas State Law Library. In other states, ask a local real estate attorney whether the deed form is valid before you rely on it.
Can you sell a property with a life estate?
Yes, but with a traditional life estate, the life tenant and every remainderman must sign the deed to sell the whole property. A buyer, lender and title company will want clear fee simple title, and no single party can deliver that alone.
Either side is free to sell just their own interest, but there’s rarely a market for it. Few buyers want to pay for a building they can’t occupy until a stranger dies, or for rights that vanish at a death they can’t predict. That’s why most life estate sales are joint sales of the entire property.
- Confirm the deed type and the remaindermen named in it with a title search.
- Get every remainderman to agree on price and terms. If one is a minor or lacks capacity, a court-appointed guardian or conservator may need to sign.
- Agree in writing how the proceeds will be split. Many families use the IRS actuarial tables as the starting point.
- Have the title company confirm who must sign, including spouses where state law requires it.
- Close the sale with all parties signing the deed, and pay out the proceeds according to the written split.
How are sale proceeds split between the life tenant and remainderman?
Proceeds are usually split by the actuarial value of each interest on the sale date. Under Section 7520, life estates and remainders are valued with IRS mortality tables and an interest rate equal to 120% of the federal midterm rate for the month of valuation, rounded to the nearest 0.2%. The IRS publishes that rate monthly.
The current one-life factors are in Table S, based on the 2010CM mortality table, in IRS Publication 1457, Actuarial Values Version 4A. They apply to valuation dates on or after June 1, 2023. The older the life tenant, the smaller the life estate factor and the larger the remainderman’s share.
Families can agree to a different split, but a split that moves value from one person to another can be a gift. Before you sign a proceeds agreement, have your CPA check the factor for the life tenant’s age and the rate for the month of the sale.
Tax basis: why the remainderman gets a stepped-up basis at death
When a parent deeds property to a child and keeps a life estate, the whole property is usually pulled back into the parent’s estate at death under Section 2036, and the child gets a stepped-up basis equal to its fair market value on that date under Section 1014. That step-up is often the biggest tax reason families use a retained life estate.
Section 1014(b)(9) covers property acquired from a decedent because it was included in the estate. So gain from years of appreciation, and the depreciation the parent took on a rental, can disappear for income tax purposes. Inherited property is also treated as held long term, no matter how soon the remainderman sells.
Creating the life estate is a gift too. Under Section 2702, when you give the remainder to a family member and keep a life estate, your retained interest is generally valued at zero, so the gift is the full value of the property. You report it on a gift tax return, Form 709. With the 2026 basic exclusion amount at $15,000,000, most families owe no gift tax, but the filing still matters.
What happens to basis if you sell during the life tenant’s life?
Selling before the life tenant dies gives up the step-up on the remainderman’s share, because there’s no death yet to trigger it. Basis gets split between the two interests by actuarial factors, under rules in Treasury Regulation 1.1014-5 that also apply to gifted property.
Section 1001(e) sets a trap. If someone sells only a life interest, the part of basis that came from an inheritance or gift is ignored, so the whole price can be taxable gain. That rule doesn’t apply when the life tenant and remainderman sell the entire property together in one transaction, which is another reason joint sales are the norm.
Rental buildings held under a life estate
With a rental building, the life tenant generally collects the rents, pays the operating costs and reports the income. Section 167(d) gives the depreciation deduction to the life tenant, computed as if the life tenant were the absolute owner.
There is an exception. Under Section 167(e), a person who holds only a term interest, such as a life estate they bought, gets no depreciation while a related person holds the remainder. That rule targets split purchases between family members, not the usual parent-keeps-a-life-estate deed.
The life tenant also has a duty not to commit waste, meaning they can’t let the building deteriorate in ways that hurt the remainderman. Major decisions such as a cash-out refinance, a big capital project or a long-term lease that runs past the life tenant’s life often need the remainderman’s signature, because lenders and tenants want the future owner bound.
Worked example: selling an 8-unit building under a life estate
A mother owns an 8-unit apartment building with an adjusted basis of $250,000 after years of depreciation. In 2015 she records a traditional life estate deed naming her son as remainderman. She continues to collect the rents and claim depreciation.
Option 1: they sell together while she is alive for $2,400,000. Suppose the Table S factor for her age and that month’s Section 7520 rate is 0.40. She receives $960,000 for her life estate and her son receives $1,440,000 for the remainder. Because she’s alive, there is no step-up, and the gain on the low basis gets taxed, split between them by the same factors.
Option 2: she dies when the building is worth $2,400,000. The property is included in her estate under Section 2036, so the son’s basis becomes $2,400,000. Eight months later he sells it for $2,550,000 with $102,000 of selling costs. His taxable gain is $48,000.
Compare a plain gift deed in 2015 with no life estate. The son would take her $250,000 carryover basis, and the same $2,550,000 sale with $102,000 of costs would produce $2,198,000 of gain. Keeping the life estate turned a gain of more than $2.1 million into $48,000.
| Scenario | Sale price | Selling costs | Basis used | Taxable gain |
|---|---|---|---|---|
| Son inherits through life estate, then sells | $2,550,000 | $102,000 | $2,400,000 (stepped-up) | $48,000 |
| Son received a plain gift deed in 2015 | $2,550,000 | $102,000 | $250,000 (carryover) | $2,198,000 |
| Joint sale while mother is alive | $2,400,000 | Shared | Split by factor | Gain on low basis, split 40/60 |
How this works for a 5+ unit apartment building
On a 5+ unit apartment building, a life estate adds signatures, not just paperwork. A buyer’s lender will want every remainderman on the deed, the tenant estoppel certificates and rent roll will come from the life tenant’s management, and the title company will want the proceeds split settled before closing.
Time can work in the family’s favor. If the life tenant is elderly and the building has a low basis, holding until death and selling after the step-up often costs far less tax than selling now. If the building needs major capital work, has code violations or is losing money, the family may still be better off selling now and taking a smaller after-tax number over a shrinking one.
Remaindermen who inherit and want out quickly can sell, use a 1031 exchange into another property, or offer seller financing for an installment sale. After a fresh step-up there’s usually not much gain left to defer, so many simply sell for cash.
Selling a life estate property to Skyline
Skyline Capital Investments buys 5+ unit apartment buildings nationwide, including buildings held under a life estate and buildings remaindermen have just inherited. We work with every signer, wait while the title company sorts out the remainder interests and can close on a schedule that fits the family.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
