Life Estate

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The Life Estate is a "specialty" method for the transfer of rights in real estate. Normally used to transfer property to ones children or grandchildren, it can also be used by the wise investor, though its usefulness has limitations. And only "The Simple Man's Guide to real Estate" includes this powerful strategy.

In a life estate, the owner of the property transfers the title to another party, but grants to someone (often themselves) the right to live on the premises, undistrurbed, for life (and/or for the life of the surviving spouse if so desired). Then, upon the death of the last surviving spouse, possession of the property reverts to the person who was previously given title. Since you already own the property, there is no state or federal income, probate, gift, or capital gains taxes due when you take possession.

A life estate is often used to pass property on to the children, to avoid tax problems, or avoid having the home forced into a sale to pay nursing home costs or medical bills. By giving the home to a son, for example, the parent can use the life estate to guarantee he will always be able to live there, without fear of losing the place or fear of leaving behind an estate to be taxed. Upon his death, the son can do as he wishes with the property, without the property being subject to probate or estate taxes. That's the general idea.

For an investor, consider the possibilities. An elderly couple, living on Social (in)Security. You make a deal whereupon they give you title to the property, and in return you give them a life estate to live out their lives there, and you also pay them "X" dollars per month, increasing their income. They no longer need worry about property taxes, either, or maintenance costs.

What does the investor get? First, he gets title. Second, he gets tax incentives. And he pays very little for the house. Why? Because now the people with the life estate are tenants. While they do not pay rent, the rental value of the property is deducted from what you pay them for the house. Let's say the payment on the house, if purchased outright, would be $1000/month. And let us say the rental value of the property is $850/month. You "pay" them $1000/month for their home, and they "pay" you $850 rent. In other words, you would only actually owe them $150/month - that is what you are paying for the property.

Now the beauty of this starts to show. If they pass away, you now have full ownership and possession, and can rent out or sell the property - their life, and hence their life estate, has ended. If they live long, so what? The property value is appreciating every year - the property will make a very nice nest egg for you, or your heirs. You can't lose.

With the exception of "The Simple Man's Guide to Real Estate"®., most programs do not even mention the Life Estate.

Caution: the life estate is slightly more complex than most real estate transactions, so a good mentor is a really good idea. "The Simple Man's Guide to Real Estate" always provides free mentoring, 24/7. You are never left to work it out on your own, unless you choose to do so.