Selling a life estate property usually does trigger capital gains tax, but who owes what depends on whether the life tenant is still living at the time of the sale and how the life estate was originally set up. Capital gains tax on a life estate sale falls on both the life tenant and the remainderman when the property is sold during the life tenant’s lifetime, with each paying tax on their allocated share of the profit. When the sale happens after the life tenant dies, the remainderman often owes little or nothing because a stepped-up basis resets the property’s cost to its value on the date of death. That step-up only applies in certain arrangements, and the distinction can mean a six-figure difference in tax.
When the Sale Happens During the Life Tenant’s Lifetime
A life tenant and a remainderman both hold legal ownership at the same moment. The life tenant’s interest lasts for their life; the remainderman’s interest takes over afterward. If the property sells before the life tenant dies, both parties receive proceeds and both owe capital gains tax on their own portion of the gain. Neither one carries the whole bill.
The split is not 50/50. The IRS assigns each party a share using actuarial factors that depend on the life tenant’s age at the sale and a federally set interest rate.
How the IRS Divides the Proceeds
The allocation comes from Table S in IRS Publication 1457, which pairs a “life estate factor” with a “remainder factor” based on the life tenant’s age and the Section 7520 rate for the month of the sale. The Section 7520 rate is 120 percent of the federal midterm rate, rounded to the nearest two-tenths of a percent; for early 2026 it has been around 4.8 percent.1Internal Revenue Service. Section 7520 Interest Rates
The life estate factor is the life tenant’s percentage of the proceeds. One minus that factor is the remainderman’s share. If an 80-year-old life tenant has a factor of 0.30, the life tenant takes 30 percent of the sale price and the remainderman takes 70 percent. Each side then figures its own capital gain by subtracting its allocated basis from its allocated proceeds.2Internal Revenue Service. Actuarial Tables
A higher 7520 rate shifts more of the value to the remainderman, since a future interest is worth less to wait for when rates are higher. A younger life tenant, by contrast, has a larger life estate factor because that interest is expected to last longer. Selling the same property a few months apart can move thousands of dollars in tax between the two parties.
Figuring Out the Cost Basis
Cost basis is the number you subtract from the sale price to find your gain. For life estate property, how you calculate it depends on how the life estate was created.
Property That Was Purchased
If the property was bought outright, the basis is the original purchase price plus capital improvements such as a new roof, an addition, or a major renovation. Depreciation taken during any period of business or rental use reduces the basis. That adjusted number is what gets split between the life tenant and the remainderman using the actuarial factors.
Property That Was Gifted
Most life estates are created when a property owner deeds the home to their children while keeping the right to live there. That is a gift of the remainder interest, and gifted property carries what the tax code calls a carryover basis: the recipient takes on the donor’s adjusted basis.3Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
If a parent bought a home for $80,000, spent $20,000 on improvements, and then created a life estate, the adjusted basis for both parties is $100,000. That figure is split between life tenant and remainderman at sale using the actuarial tables. On a home that has appreciated for decades, carryover basis can leave a large taxable gain.
The Primary Residence Exclusion
Section 121 lets you shield up to $250,000 of gain from the sale of your primary residence, or $500,000 if you are married filing jointly. You qualify if you owned and lived in the home for at least two of the five years before the sale.4Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
Each party’s eligibility is tested independently. The life tenant almost always qualifies, because living in the home is the whole point of a life estate. The remainderman usually does not, unless they also lived in the property as their primary home for two of the past five years. Most remaindermen are adult children who live elsewhere, so they typically pay tax on their full share of the gain.
Selling Just the Remainder Interest
A remainderman can also sell their interest by itself. The tax code lets them elect to apply the Section 121 exclusion to that standalone sale of a remainder interest in a principal residence.4Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
The election is unavailable if the buyer is a “related party.” That category includes siblings, spouses, parents, grandparents, children, and grandchildren.5Office of the Law Revision Counsel. 26 U.S. Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers A child who holds the remainder interest and tries to sell it to a sibling or back to the parent cannot use the exclusion. Families often assume an intrafamily sale still qualifies and are surprised by the tax bill.
The Stepped-Up Basis After the Life Tenant Dies
The largest tax break in a life estate arrives after the life tenant passes away. If the arrangement qualifies, the remainderman’s basis resets to the property’s fair market value on the date of death, wiping out years of appreciation in one step.
Say the original basis was $100,000 and the home is worth $400,000 when the life tenant dies. The remainderman’s new basis is $400,000. Sell for $410,000, and the taxable gain is $10,000 rather than $310,000.
This Only Works for Retained Life Estates
The step-up depends on two statutes lining up. Section 2036 pulls the property into the deceased life tenant’s gross estate, but only when the life tenant was the original owner who transferred the property while keeping the right to live there. Section 1014 then gives property included in a decedent’s gross estate a basis equal to fair market value at death.6Office of the Law Revision Counsel. 26 U.S. Code 2036 – Transfers With Retained Life Estate7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
When someone other than the property owner created the life estate, such as a grandparent’s will granting a relative the right to live in the home before it passes to a different beneficiary, Section 2036 does not apply. The life tenant never owned the property and never transferred anything, so it is not included in their estate, and there is no step-up. The remainderman’s basis instead traces back to the fair market value at the original owner’s death, which can be a shock if the property appreciated substantially in between.
If you are a remainderman and are unsure which kind of life estate you have, the deciding question is simple: did the life tenant originally own the property and then deed it to you while keeping the right to live there? If yes, you are likely in line for a stepped-up basis. If someone else set the arrangement up, you probably are not.
Which Capital Gains Rates Apply
Life estate property has almost always been held for years, so the gain qualifies as long-term and is taxed at lower rates than ordinary income. For 2026, long-term capital gains rates are:
- 0 percent on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15 percent on taxable income from $49,451 to $545,500 (single) or $98,901 to $613,700 (married filing jointly)
- 20 percent on taxable income above $545,500 (single) or $613,700 (married filing jointly)
These brackets apply to your total taxable income, not just the property gain. A large sale can push you into a higher bracket for the year.
Higher earners also owe the 3.8 percent net investment income tax on capital gains when modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly). Real estate gains count toward that calculation, so a remainderman with other substantial income could face a combined federal rate of 23.8 percent on their share.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Reporting the Sale on Your Return
Both the life tenant and the remainderman report their share of the sale on their own returns. The closing agent is required to issue a separate Form 1099-S to each party showing their allocated share of the gross proceeds.9Internal Revenue Service. Instructions for Form 1099-S Proceeds From Real Estate Transactions If no allocation is provided at closing, the full unallocated sale price may end up on each person’s 1099-S, which creates confusion at tax time.
Each party then reports its share on Form 8949 (Sales and Other Dispositions of Capital Assets), which feeds into Schedule D of Form 1040. You list the property, your share of the proceeds, your allocated basis, and the resulting gain or loss. If the 1099-S shows the full sale price rather than your allocated portion, report the full amount and make an adjustment on Form 8949 to reflect only your share.10Internal Revenue Service. 2025 Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets
Working out the actuarial allocation before closing saves both parties trouble. Bringing that calculation to the closing table lets the title company split the 1099-S correctly from the start.
One Related Item: Gift Tax When the Life Estate Was Created
Creating the life estate is a separate transaction from selling the property, but it carries a filing obligation that affects the remainderman’s basis records. Deeding a home to a child while keeping a life estate is a gift of the remainder interest, and a remainder interest is a “future interest” that does not qualify for the annual gift tax exclusion ($19,000 per recipient for 2026).11Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The full value of the remainder interest, calculated with the same actuarial tables and 7520 rate discussed above, must be reported on Form 709 regardless of amount.12Internal Revenue Service. Instructions for Form 709 The gift usually produces no actual tax because it draws against the lifetime exemption, but skipping Form 709 can complicate basis documentation years later when the remainderman sells.