Life Estate Deed Taxes 2026: Gift, Step-Up, Rental, Medicaid

Two deeds that sound alike, and what each does to your taxes

An ordinary life estate deed gives the children the remainder today and keeps for you the right to use or rent the property for life. An enhanced life estate deed, also called a Lady Bird deed, keeps the life estate and also reserves the power to sell, mortgage or give the property away without the children’s consent; if you never use the power, the children take at your death. The names vary by state and by lawyer, and a few states have a statute (see the state table below). The federal tax results differ in several places:

The gift at signing: what the section 7520 tables say, and why they may not apply

The tables. Section 7520(a) values “any interest for life or a term of years, or any remainder or reversionary interest” under IRS tables, at 120% of the mid-term federal rate for the month of the valuation date, rounded to the nearest 0.2%. For gifts made on or after June 1, 2023 the table is built on Table 2010CM (26 CFR 25.2512-5(d)). The rate comes from the monthly revenue ruling:

Two points on the rate. First, the look-back to either of the two prior months in section 7520(a) is available only “If an income, estate, or gift tax charitable contribution is allowable for any part of the property transferred,” so a gift to a child uses the rate of the month the deed is signed (our reading). Second, do not confuse the rulings: Rev. Rul. 2026-20 concerns a securities transfer to a new exchange traded fund under section 351, not a rate. The rates are in 2026-19 (October) and 2026-21 (November). The December 2026 rate will come in a new ruling, and our applicable federal rate page tracks each month.

The factors. Table S lists, for each age and each rate, an annuity factor, a life estate factor and a remainder factor; the life estate and remainder factors add to 1. We read them from the IRS file:

A worked example (our arithmetic). A 70-year-old owns a $500,000 rental and deeds the remainder to a nephew and keeps a life estate, in November 2026. Life estate factor 0.55965 times $500,000 is $279,825; remainder factor 0.44035 times $500,000 is $220,175, the amount of the gift. A nephew is not in the section 2702 family list, which names a spouse, ancestors, lineal descendants, brothers and sisters and their spouses (26 CFR 25.2702-2(a)(1)), so the tables decide (our reading). The tables also yield to the facts if the life tenant is known to be terminally ill: at least a 50 percent probability of death within one year (26 CFR 25.7520-3(b)(3)).

The same deed to a child. Section 2702(c)(1) says a transfer of property with respect to which there are term interests “shall be treated as a transfer of an interest in a trust,” and a life interest is a term interest (2702(c)(3), 26 CFR 25.2702-4(a)). Under 2702(a)(2)(A), “The value of any retained interest which is not a qualified interest shall be treated as being zero.” A life estate is not a qualified interest, which is a fixed-amount or fixed-percentage payment right (2702(b)). So “the amount of the gift is the entire value of the property” (25.2702-1(b)). The Treasury’s own example is a rental: “K holds rental real estate valued at $100,000,” sells the remainder to a child and keeps the income, and “K has made a gift in the amount of $100,000 less the consideration received” (25.2702-4(d) Example 2). Applied to our example, a life estate deed of the $500,000 rental to a child is a $500,000 gift, not $220,175 (our reading).

Three exits from that result exist, and none fits a typical deed:

• Incomplete gift. Section 2702 does not apply “if such transfer is an incomplete gift” (2702(a)(3)(A)(i)). A Lady Bird deed is built to be one (our reading).
• Tangible property rule. The retained term interest is valued at what a willing buyer would pay, not zero, but only for property for which “no deduction for depreciation or depletion would be allowable if the property were used in a trade or business or held for the production of income” (25.2702-2(c)(2)(i)(A)). A building would be depreciable if rented, so this helps with vacant land, not with a house or a rental (our reading).
• Personal residence trust. Section 2702(a)(3)(A)(ii) exempts a trust holding a residence, and 25.2702-1(c)(2) requires a trust that meets 25.2702-5. A deed with no trust is not that. Our qualified personal residence trust guide covers the trust route.

What it costs in tax. A gift of $500,000 or $220,175 is far below the 2026 basic exclusion amount of $15,000,000 (Rev. Proc. 2025-32), so no gift tax is paid; it uses $500,000 or $220,175 of exemption and leaves $14,500,000 or $14,779,825 if there were no earlier gifts (our arithmetic). The $19,000 annual exclusion cannot reduce it: section 2503(b)(1) excludes “gifts of future interests in property,” and the Form 709 instructions list “reversions, remainders, and other similar interests or estates” as future interests. Our annual gift tax exclusion page explains the exclusion and the filing.

At death: the estate inclusion and the step-up in basis

Section 2036(a)(1) puts in the gross estate property you transferred while keeping “the possession or enjoyment of, or the right to the income from, the property” for life, and section 2038(a)(1) does the same where you can “alter, amend, revoke, or terminate.” Section 1014(b)(9) then treats the property as acquired from the decedent “if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate,” and 1014(a)(1) sets the basis at “the fair market value of the property at the date of the decedent’s death.” The gross estate inclusion needs no estate tax to be owed: with a $15,000,000 basic exclusion in 2026, most estates owe none, and the step-up still applies (our reading; see our step-up in basis guide and estate tax exemption page). Section 2001(b) leaves out of “adjusted taxable gifts” any gift “includible in the gross estate of the decedent,” so a gift pulled back by section 2036 is not counted twice (our reading).

The comparison that matters is the outright gift deed, where section 1015(a) gives the donee a basis “the same as it would be in the hands of the donor.”

The 25% is the cap on “unrecaptured section 1250 gain” in 26 U.S.C. 1(h)(1)(E), and the 20% is the top rate of 1(h)(1)(D). The catch with a life estate deed is that the step-up is conditional: if the owner sells during life, there is no death, and the owner pays tax on the gain with the old basis. With an ordinary life estate deed the sale also needs the remainder owners to join (our reading), and the proceeds are split between the life estate and the remainder; we do not model that split here.

Rental property: depreciation, recapture and the 167(e) question

While you are alive. Section 167(d) says that for “property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.” That is the rule most people rely on. But section 167(e)(1) says: “No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.” A life interest is a term interest (1001(e)(2)(A)), and “related person” is anyone related under section 267(b) or (e) (167(e)(5)(B)), which for family means “brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants” (267(c)(4)). Disallowed deductions move into the remainder’s basis (167(e)(3)). On the text, an ordinary life estate deed of a rental to your children puts the life tenant’s depreciation at risk (our reading). We found no ruling or regulation applying section 167(e) to a life estate the owner keeps after a gift, and the one private ruling we read (PLR 200852013) concerned purchased interests; a CPA must decide this before the deed is signed.

With a Lady Bird deed, the owner keeps the power to take the property back, so no term interest has been split off to a related person by a completed transfer (our reading). That is a reason a tax adviser may prefer it for a rental, and the price is the homestead, creditor and Medicaid questions that vary by state.

At death. Section 1250(d)(2) says the recapture rule “shall not apply to a transfer at death,” and the step-up under 1014 resets the basis, so the depreciation you took is never taxed to the heirs; they depreciate the new basis. Section 1014(b)(9) reduces the basis by depreciation “allowed to the taxpayer” only when the property was “acquired before the death of the decedent,” which targets depreciation the acquiring heir claimed, not the owner’s (our reading). Section 1250(d)(1) says recapture does not apply to a gift, but the donee’s carryover basis (1015(a)) keeps the built-in gain, and the 25% rate on unrecaptured gain applies when the donee sells (our reading). Our depreciation recapture guide has the mechanics.

Property tax and recording: state and county rules, not federal

No federal rule decides what recording the deed does to the assessed value or the homestead exemption; the state and county do, and the answers differ. What we read: Vermont’s statute says a recorded enhanced life estate deed “shall be subject to the property transfer tax under 32 V.S.A. chapter 231” (27 V.S.A. 654(d), added effective January 1, 2022). For Florida’s homestead, Save Our Homes and documentary stamp results, see our Florida Lady Bird deed page; we do not repeat them here. For any other state, ask the recorder or assessor three questions before signing: does recording trigger a transfer tax or reassessment, does a life tenant keep the homestead or senior exemption, and does the owner’s death reassess the property for the children. We did not verify those answers outside Vermont and Florida.

Medicaid: the look-back, the penalty and estate recovery

The transfer. Federal law requires a state to deny nursing-home and home-care coverage when an applicant “disposes of assets for less than fair market value on or after the look-back date” (42 U.S.C. 1396p(c)(1)(A)). For a disposal on or after February 8, 2006, the look-back date is 60 months before the application (1396p(c)(1)(B)(i)). The penalty is the uncompensated value divided by “the average monthly cost to a private patient of nursing facility services in the State” (1396p(c)(1)(E)(i)). If a state valued the remainder from our example at $220,175 and the monthly cost were $10,000 (our assumption), the penalty would be 22.0 months (our arithmetic). A state’s own manual decides how it values a remainder and whether a Lady Bird deed counts as a transfer when signed; we did not verify any manual.

Exempt transfers of the home. Section 1396p(c)(2)(A) exempts a home transferred to a spouse; to a child under 21 or a blind or disabled child; to a sibling with an equity interest who lived there for at least one year; or to a son or daughter who lived in the home for at least two years before the owner entered an institution and provided care that kept the owner out of it.

Estate recovery. The federal floor is the probate estate. Section 1396p(b)(4)(B) says a state’s estate “may include, at the option of the State,” other assets conveyed “through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement.” So a deed that avoids probate is safe from recovery only in a state that has not used the option, and the state’s statute decides; our Florida page shows one state’s text. A Medicaid asset protection trust is a different tool and needs its own guide.

Home equity. For long-term care, the statute bars coverage when equity in the home exceeds $500,000 (1396p(f)(1)(A)); for 2026 CMS lists a minimum of $752,000 and a maximum of $1,130,000 (CMS bulletin, April 27, 2026), and each state picks within that range.

Which states recognize the deed in a statute

Only a state’s own statute counts here. We read two sources and found one law:

What a reader can do with this

• Decide who the remainder goes to. Children are inside the section 2702 family list and a nephew is outside it; the gift value differs by $279,825 in our example ($500,000 against $220,175).
• Ask the lawyer which deed is being drafted. An ordinary life estate deed and a Lady Bird deed are different tax events at signing, in the estate, for a rental’s depreciation and in a state’s Medicaid manual.
• Price the step-up. Compare your adjusted basis, including depreciation, with today’s value; the gap is the gain a gift deed would hand your heirs.
• For a rental, put section 167(e) on the CPA’s list before any deed to children, and ask whether to keep depreciating.
• If Medicaid is possible within five years, treat a deed of the remainder as a transfer that starts a 60-month look-back and find your state’s manual first.
• Keep the factor file. Use the rate of the month you sign (6.20% in November 2026, not October’s 5.60%) and keep the Table S page with the Form 709.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 20, 2026: IRS Rev. Rul. 2026-19, 2026-20 and 2026-21 (irs.gov); IRS Table S and Table 2010CM (irs.gov, tege files) and Publication 1457; Rev. Proc. 2025-32; Instructions for Form 709 (2025); PLR 200852013; 26 U.S.C. 1, 167, 267, 1001, 1014, 1015, 1250, 2001, 2036, 2038, 2503, 2702, 6019 and 7520 (Legal Information Institute, Cornell); 26 CFR 25.2511-2, 25.2512-5, 25.2702-1, 25.2702-2, 25.2702-4, 25.2702-5 and 25.7520-3; 42 U.S.C. 1396p; CMS Center for Medicaid and CHIP Services Informational Bulletin of April 27, 2026; Vermont Statutes, 27 V.S.A. chapter 6 (legislature.vermont.gov); South Carolina General Assembly, bill H. 4264 (scstatehouse.gov). Worked examples are our arithmetic from those sources. This is analysis of public documents, not investment, legal or tax advice.