On a life estate property, the life tenant pays the property taxes. That obligation follows the basic rule that whoever has the right to live in or use the property carries its running costs. The remainderman, who only takes possession after the life tenant dies, has no property tax bill during the life tenant’s lifetime under the default rules. Other taxes attached to a life estate, including gift tax at creation and capital gains tax at sale or inheritance, fall on different people at different times.
What the Life Tenant Pays and Deducts
The life tenant has exclusive possession of the property, so they handle the annual bills: property taxes, homeowners insurance, routine maintenance, and mortgage interest on any existing loan. Because the life tenant is the one writing those checks, the life tenant is the one who claims the deductions on their federal return.
Property taxes go on Schedule A as part of the state and local tax (SALT) deduction. For 2026, the SALT deduction is capped at $40,400 for most filers, and that cap begins phasing down once income exceeds $505,000.1Bipartisan Policy Center. How Does the 2025 Tax Law Change the SALT Deduction? Since the cap covers property taxes, state income taxes, and local taxes combined, a life tenant in a high-tax jurisdiction can hit the ceiling quickly. Mortgage interest paid by the life tenant is also deductible under the ordinary homeowner rules. The remainderman, who is not making these payments, cannot claim either deduction.
If the life tenant rents the property out rather than living in it, the rental income belongs entirely to them and gets reported on their return, along with the corresponding rental expenses.
What the Remainderman Covers
The remainderman’s financial role is narrow but real. Under traditional property law, mortgage principal payments belong to the remainderman because those payments build equity in the asset they will eventually own. The life tenant pays the interest; the remainderman pays down the balance.
Major capital improvements that extend the property’s useful life well beyond the life tenant’s occupancy, such as a new roof or HVAC replacement, also fall to the remainderman. Routine repairs that keep the property in its current condition stay with the life tenant. The line between “repair” and “improvement” can blur in practice, and disputes over that line are common.
What Happens If the Life Tenant Stops Paying Property Taxes
Unpaid property taxes create a tax lien, and tax liens take priority over almost every other interest in the property, including both the life estate and the remainder interest. If the delinquency runs long enough, the taxing authority can sell the property, wiping out both parties.
That risk is why the remainderman has a legal right to step in and pay the overdue taxes to protect their future ownership. After paying, the remainderman can seek reimbursement from the life tenant, or from the life tenant’s estate if the life tenant has died. Remaindermen who assume the life tenant is handling payments sometimes discover the problem only after penalties and interest have piled up, so watching the tax status is worth the effort.
When the Deed Says Something Different
The rules above are defaults. The document that creates the life estate, whether a deed or a will provision, can rearrange them. A grantor can require the remainderman to pay property taxes, set up a trust to cover all property expenses, or split costs by percentage. Whatever the creating document says controls; the common law defaults only fill gaps the document leaves open. Both parties should read that document before assuming who owes what.
Gift Tax When the Life Estate Is Created
Creating a life estate and naming a remainderman is treated as a gift of the remainder interest for federal tax purposes. Because the remainderman does not take possession until the life tenant dies, that remainder interest is a “future interest,” and future interests do not qualify for the $19,000 annual gift tax exclusion.2Internal Revenue Service. 2025 Instructions for Form 709 The grantor has to file Form 709 regardless of the gift’s value.3Internal Revenue Service. What’s New – Estate and Gift Tax
The value of that remainder interest depends on the life tenant’s age and the IRS Section 7520 interest rate for the month of the transfer. That rate has ranged from 4.6% to 4.8% across 2026.4Internal Revenue Service. Section 7520 Interest Rates A younger life tenant produces a smaller remainder value because the remainderman waits longer. Actual gift tax rarely comes due because the 2026 lifetime exemption is $15,000,000,3Internal Revenue Service. What’s New – Estate and Gift Tax but skipping the filing can cause problems later if the IRS questions the property’s valuation or the grantor’s remaining exemption.
Taxes When the Property Is Sold During the Life Tenant’s Lifetime
A sale requires both parties to agree. When it happens, the proceeds are divided between the life tenant and the remainderman using IRS actuarial tables, which factor in the life tenant’s age at the time of sale.5Internal Revenue Service. Actuarial Tables Older life tenants get a smaller share because the expected remaining use of the property is shorter. The closing agent issues Form 1099-S, and life estates are specifically included in the IRS definition of reportable ownership interests.6Internal Revenue Service. Instructions for Form 1099-S
Each party reports their allocated share of any capital gain on their own return. If the life tenant used the property as a principal residence for at least two of the five years before the sale, they can exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, under Section 121.7Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence The remainderman generally cannot use that exclusion on a jointly sold property because they did not live there, though the statute does allow the exclusion for a separately sold remainder interest if the remainderman meets the residency test.
Stepped-Up Basis When the Life Tenant Dies
This is the tax feature that drives most life estate planning. Federal law requires the full value of the property to be included in the life tenant’s gross estate,8Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate and because it is included, the remainderman receives a basis equal to the property’s fair market value at the date of death.9Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
A quick example. A home bought for $150,000 that is worth $400,000 when the life tenant dies. Had the property been given outright during the grantor’s lifetime, the recipient would carry the original $150,000 basis and owe capital gains tax on $250,000 when they later sold. With a life estate, the remainderman’s basis resets to $400,000, and selling near that figure produces little or no taxable gain. On appreciated real estate, that difference can be worth tens of thousands in capital gains tax.
A Note on Medicaid
Life estates are often used to shield a home from Medicaid estate recovery, but the tax rules and the Medicaid rules are separate systems. Federal law lets states recover Medicaid costs from any property in which the deceased recipient held a legal interest at death, and that can include a life estate.10Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Creating the life estate also starts Medicaid’s five-year look-back clock; a Medicaid application within that window can trigger a penalty period based on the value of the remainder interest transferred. Neither of these is a tax question, but anyone weighing a life estate for property tax reasons should know they exist before signing the deed.