Tax Implications to the Seller
The sale of a life estate in the home is considered a partial sale of an interest in real estate subject to income tax on any gain realized. The sale would qualify for the homestead exemption under Section 121 of the Internal Revenue Code that allows for an exclusion of gain in the amount of $250,000 for a single individual ($500,000 for a married couple) as long as the requirements of the section are met (lived in two out of last five years). Any portion of the exclusion amount not utilized on the sale of the life estate can be used later.
AND, even if you did not live it in two out of last five years, there is a healthy kind of pro-rated exclusion possibility.
This really means the seller is reducing their basis in the property.
That is the answer that would apply to most situations.