Person A deeds a residential real estate property to remainderman B, with A retaining a life estate. A receives no compensation of any kind for this. Presumably the value of the transferred remainder interest is a potentially taxable gift from A to B? (And cannot be shielded from by the annual gift tax exclusion because it is a gift of a future interest?)
Both before and after the establishment of the life estate A is renting the property out and is depreciating it. What happens to the depreciation when A's full interest in the property turns into a life estate? Does it continue as if nothing happened, or does it have to be reduced because the value of the life estate is significantly less than what the full interest was.
Years later, B purchases the life estate from A for $X, obtaining full title to the property. What is B's basis in the property? I would naively think it would be $X plus the basis in A's hands of the remainder interest on the day the remainder interest was created (following the rule that the basis of a gift of appeciated long-term property is the basis in the giver's hand).
By contrast, what happens if B achieves a full interest in the property via A's death? If I recall correctly, the full value of the property is included in A's taxable estate, despite A only holding a life estate, and despite the remainder interest being gifted, and therefore B's basis will be the property's full FMV on the day A died?