In 1997 the taxpayer and his sister inherited from their grandmother a remainder interest in a house. with their 70-year old mother inheriting a life interest. In 2002 while the mother was still alive, the house was sold at a gain.
The 1997 valuation of the life interest of the taxpayer and his sister was determined as the present value of residential rental rates for the house over the life expectancy of the mother, and the 2002 valuation of the life interest was determined as its value in 1997 escalated in proportion to the increase in value of the whole property, and then proportionately reduced to reflect the decrease over the five years in the life expectancy of the mother from 10.02 years to 12.44 years. The remainder interest was valued in 1997 (for purposes of determining its adjusted cost base) and in 2002 (for purposes of determining the proceeds of disposition) by taking the residual values.