Massachusetts is not a community property state and the probate laws changed in January of 2012. If the Life Estate actually exists then all the owner's of the property, the father and the two sons would have to sign the Deed in order to sell the property or sign a Mortgage in order to Mortgage the property during the Life Tenant's (father's) lifetime. The father as well as the son's should get a 1099-Gross Proceeds for the sale of the property generated by the Life Estate sale. IRS tables determine the respective ownership interest in the property for purposes of calculating taxes depending on the age of the Life Tenant at the time that a property is held in the Life Estate form of ownership is sold. Publication 1457 Actuarial Valuations Version 3A contains the amounts for use for valuing annuities, life estates, and remainders generally. Publication 1457 can be downloaded from the IRS website at www.irs.gov.
The basis of the Life Tenant's (father's) home is the purchase price plus additional improvements that were added or extended the structure's life over the last 50 years. Massachusetts is not a community property state so you must see if there are any rules that apply to the father's value if his wife is deceased before 2012. The expenses of the sale must be listed from the Final Settlement Statement so that the actual gain is reduced. The Life Tenant (father) will be allowed the exclusion $250,000, assuming the wife has passed away more than 24 months ago and he is filing single. If his wife passed away within the past 24 months then he will be entitled to file married filing joint and receive the $500,000 exclusion. This exclusion will exist if his wife is still alive and he is filing married filing joint. The son's will not be allowed any exclusion which is a shame because at the date their father would pass in the future, and if he is the last parent to pass, they would have a stepped up value and realize little or no gain on the sale of the family residence. The Life Estate in Massachusetts is a tool also used to avoid probate and to circumvent the Medicaid or state from filing a lien against the house for medical expenses. This is a very sad situation because the 60 month Medicaid disqualification period had been fulfilled if the Life Estate was created in 2009. At this time the money received from the sale of the house will be available for any and all expenses incurred by the father until his death which totally negates the reason that the father put his home in the Life Estate. If the sale did not take place then the sons could inherit the house at their father's date of death at Fair Market Value without any problem with any liens or Medicaid intervention. Rental of the property would have been a better decision than the sale. Good Luck, there is an awful large amount of information that must be put in place in order to calculate the sale for each of them. Normally, as I stated before, the escrow company would be in charge of issuing all of the correct 1099-Gross Proceeds to each the father, and both sons based on their knowledge of the Life Estate. Then you would just be responsible for reporting the father's return and the son's would not have a basis and a full gain on the amount of the proceeds granted to them according to the IRS Actuarial Table.