How should the recordation tax be calculated on a warranty deed that includes a retained life estate?

The recordation tax on the transfer of a warranty deed with a retained life estate is based on the fair market value (FMV) of the property less the value of the life estate. The preparer of the deed is responsible for calculating the value of the life estate. The valuation must reflect the fair market value of the property, life estate, and remainder interest.

 

There are two alternatives the preparer may use when calculating the value of the life estate. 

 

Alternative 1

The preparer may use the tables referenced in Tenn. Comp. R. & Regs. 1320-4-9-.01 (1983), which have been reproduced as Table VIII-A and VIII-B in Tennessee Code Annotated Volume 13 (Supp. 2017).

 

Multiply the life estate factor that applies to the life estate holder by the FMV of the property being transferred to determine the life estate value. Once the value of the life estate has been determined, that amount should be subtracted from the FMV of the property.  Recordation tax is owed on that amount. The preparer of the deed must show the calculation of the life estate when filing the deed.

 

Example:

In September 2018, a father, age 70, transfers property valued at $250,000 to his daughter, but he retains a life estate in the property.

 

Applicable interest rate per Table VIII-A is 6%

Life estate factor for a male aged 70 is .41294

 

FMV of property              $250,000

Life estate factor              x  .41294

Life estate value              $ 103,235

 

FMV of property              $250,000

Life estate value              - 103,235

Recordation tax base      $146,765

 

Recordation tax base      $146,765

Recordation tax rate       x    .0037

Recordation tax due        $   543.03

 

 

 

Alternative 2

The preparer may use the IRS Actuarial Computation Tables (select Section 1, Table S under Publication 1457). The actuarial factors used must be based on an interest rate that is equal to 120% of the midterm applicable federal rate for the month of valuation rounded to two-tenths of a percent (the applicable interest rate is provided at https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates).

 

Multiply the life estate factor that applies to the life estate holder by the FMV of the property being transferred to determine the life estate value. Once the value of the life estate has been determined, that amount should be subtracted from the FMV of the property.  Recordation tax is owed on that amount. The preparer of the deed must show the calculation of the life estate when filing the deed.

 

Example:

In September 2018, a father, age 70, transfers property valued at $250,000 to his daughter, but he retains a life estate in the property.

 

Applicable interest rate for September 2018 is 3.4%

Life estate factor at the 3.4% interest rate for a person aged 70 is .35876

 

FMV of property              $250,000

Life estate factor              x  .35876

Life estate value              $ 89,690

 

FMV of property              $250,000

Life estate value              -   89,690

Recordation tax base      $160,310

 

Recordation tax base      $160,310

Recordation tax rate       x    .0037

Recordation tax due        $   593.15

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