Advice Needed

[UpstateNYUPSer(Ret)]

I would like constructive feedback on an idea I have been thinking about for the past few days. My daughter and son-in-law are in the process of buying a townhouse which they hope will become an investment property as their future earnings grow. She has joked that maybe I would move there when I retire in 7 years but her joke has had me thinking about how this would/could work from a financial point of view. My plan is to have my mortgage paid off by the time I retire. My condo is valued at about $90K and selling it would not have any tax implications under the current tax laws which preclude any capital gains on the sale of home in which the net proceeds are $250K or less. Since the proceeds from the sale would not be considered income I assume that I would then be free to do with that money as I wish. I would not need the money for my daily needs as I would have my pension and plan on drawing SS when I turn 62. I was thinking that I would give the proceeds to them to put toward the mortgage in exchange for living there rent free for a period of time equal to the amount I give divided by the rent that they would normally be charging. For example, if they normally get $1K/month and I give them $80K I would live there for 80 months rent free. I would pay for whatever expenses I incur (utilities/cable/etc) while I live there.

I do know that I do not wish to stay where I am after I retire. It would be nice to live close (but not too close) to them and their growing family.

Does anyone see any holes in my plan? Are there tax implications or other financial hurdles that I may have overlooked? Does it make sense to do this?

 

[bbsam]

The only problem I could see is not really financial, but familial and probably relatively insignificant. Since this is an investment, what are the risks of loss? You seem committed to $X dollars, but what about beyond that? If the value of the investment were to decrease substantially (that could never happen) would you feel compelled to remain there beyond $X dollars? Say the town house loses 30% of it's value and your daughter and son-in-law can't afford to sell it. Are you willing to stay on or are you certain they could find someone else to rent the property at a rate sufficient to make it a profitable investment?

 

[UpstateNYUPSer(Ret)]

My plan would be to stay there. His family is from that area and they appear to have found their home.

It's funny you mention the value of the home declining because this is exactly what prompted them to buy it. I will post the link to the property at the end of this post--you will see that it was originally listed at $169,900 and they got it at $133,300. It had been on the market for over a year. It is valued closer to $150K so there is equity.

I am not committed to a dollar amount---I just thought that my plan would be a win/win for both. If at the end of the rent free period I decide to stay I would pay whatever the adjusted rent would be at the time. If something were to happen and they couldn't afford to sell it we would then sit down and discuss our options at that time.

For all I know they might get sick of me and have me evicted.

 

[bbsam]

You intend to be there, right there, to terrorize your daughter with the grandchildren, aren't you? And then you can sweetly smile at her and remind her time after time that it was her idea that you move in there. Wicked, Upstate. I love it!

 

[UpstateNYUPSer(Ret)]

You intend to be there, right there, to terrorize your daughter with the grandchildren, aren't you? And then you can sweetly smile at her and remind her time after time that it was her idea that you move in there. Wicked, Upstate. I love it!

Close (but not too close).

 

[moreluck]

The biggest 'hole' I see in your plan I've learned many times over.........Do not ever conduct any business with family !!!

And as an aside...that means don't co-sign anything either!

 

[UpstateNYUPSer(Ret)]

The biggest 'hole' I see in your plan I've learned many times over.........Do not ever conduct any business with family !!!

And as an aside...that means don't co-sign anything either!

My ex and I learned this the hard way when we bought our first house using our sister-in-law as our realtor. She cared more about the commission than us.

This is why I said we would have to have a lease and a written agreement regarding the money that I would give them.

 

[over9five]

The biggest 'hole' I see in your plan I've learned many times over.........Do not ever conduct any business with family !!!

And as an aside...that means don't co-sign anything either!

Agree with above.

 

[dilligaf]

I am no genius when it comes to financial things. I just have a couple of questions. What base line would you use to reclaim the money that you loaned to them? IE: (Monthly mortgage) X (# of months) = 90,000. The money that you loan them, will it pay off the purchase of the new condo? If it doesn't pay off the condo you are, in essence, making mortgage payments (including interest). This would seem to be double jeopardy to me. You loan the money and then you make the interest payment on top of that. Follow what I'm saying?

 

[UpstateNYUPSer(Ret)]

I am no genius when it comes to financial things. I just have a couple of questions. What base line would you use to reclaim the money that you loaned to them? IE: (Monthly mortgage) X (# of months) = 90,000. The money that you loan them, will it pay off the purchase of the new condo? If it doesn't pay off the condo you are, in essence, making mortgage payments (including interest). This would seem to be double jeopardy to me. You loan the money and then you make the interest payment on top of that. Follow what I'm saying?

Dilli, it would not be a loan--I would be pre-paying my rent. I would think that they would put the money toward the mortgage but would have no say in how the money would be used. I would not be making the actual mortgage payments so would have no interest deduction to claim on my taxes. I would basically be handing them a check in exchange for a place to stay for free. If this worked out and I decided to stay after the free period is over I would pay rent that would be negotiated before I moved in. The only thing that I am not sure of is whether the money would be treated as a gift or as prepaid rent.

The lawyer who handled my closing is on my area--I think I will ask her if what I am thinking of doing is a smart thing to do.

 

[island1fox]

Up state,

From a financial prospective you would have to see what the Tax laws state at the time of your sale. I am sure some changes are coming and they very well may have a negative impact.

The biggest drawback I see is living with family. I have not experienced it personally but there have been examples within the family and for the most part did not work out well. I might be great for you but cause personal problems for them or vice versa.
Be very careful before you reach the point of no return. As I say with ALL family ---nice when they visit but it is even nicer when they leave !!

 

[dilligaf]

Dilli, it would not be a loan--I would be pre-paying my rent. I would think that they would put the money toward the mortgage but would have no say in how the money would be used. I would not be making the actual mortgage payments so would have no interest deduction to claim on my taxes. I would basically be handing them a check in exchange for a place to stay for free. If this worked out and I decided to stay after the free period is over I would pay rent that would be negotiated before I moved in. The only thing that I am not sure of is whether the money would be treated as a gift or as prepaid rent.

The lawyer who handled my closing is on my area--I think I will ask her if what I am thinking of doing is a smart thing to do.

LOL Just thinking out loud. My way of thinking, it is a loan in a sense. Your way of thinking - prepaying rent. 6 of 1, 1/2 doz. of another. It's all good. I do agree with you though, the smart thing would be to talk to your lawyer, just to cover all the bases. Sounds like a good thing on the face of it.

 

[pickup]

upstate, I read your original post, you stated "to give them 80k" in that post.

Wouldn't that be considered rental income for them? Would the money flow from you to them be in one shot and hence raise a red flag ? Or could you just give them 11,000 k each, a year as a gift, so that it won't be taxed?
(By the way, if a child is produced by them in one of those years, that is another potential recipient of 11,000 k , so that you can get them that 80,000k a bit quicker .)

Or take an equity position in the house, and have them buy it back from you, piece by piece??

I only brought this up because while it is true that your sale of your 90k townhouse causes no tax implications for you, the way you give them the 80k might cause tax implications for them.

I am not sure what you are trying to exactly do in this situation, so my concerns may be unwarranted and hence, my suggestions may not be a good fit for your situation.

 

[dilligaf]

Up state,

From a financial prospective you would have to see what the Tax laws state at the time of your sale. I am sure some changes are coming and they very well may have a negative impact.

The biggest drawback I see is living with family. I have not experienced it personally but there have been examples within the family and for the most part did not work out well. I might be great for you but cause personal problems for them or vice versa.
Be very careful before you reach the point of no return. As I say with ALL family ---nice when they visit but it is even nicer when they leave !!

He wouldn't be living WITH family. Near but not with. The condo would be investment property for his daughter and SIL.

 

[moreluck]

You know, I see trouble.

You pre-pay your rent for say 5 years. You die in two years. (God forbid). That excess 3 years of rent is now your estate? Now I see the son arguing with the sister about his portion of dad's estate.....half of the 3 years of rent.

I know people say, Oh, they'd never do that." But I've seen it over & over again in many families.

 

[UpstateNYUPSer(Ret)]

pickup, that is the biggest question I have---what would be the best way to transfer the money to them? It may be smarter to do the transfer in annual installments rather than in a lump sum.

island, I do not plan on living with them. This would be their property--I would simply be a tenant.

moreluck--excellent point. This may be another good reason to do the transfer in annual installments rather than a lump sum.

 

[pickup]

You know, I see trouble.

You pre-pay your rent for say 5 years. You die in two years. (God forbid). That excess 3 years of rent is now your estate? Now I see the son arguing with the sister about his portion of dad's estate.....half of the 3 years of rent.

I know people say, Oh, they'd never do that." But I've seen it over & over again in many families.

Upstate would be dead, he either won't care or he will have other concerns at the time.

 

[klein]

I think Upstate should plan further ahead then that.
You can`t always assume you`ll be walking around a be healthy.

What if you get sick, can`t walk, or you are in bed ridden.

I`m sure the US has nice retirement homes/condos/apartments, that have a nurse on hand, some even supply meals, ofcourse entertainment, too.

I think your daughter and inlaw would be getting sick and tired of you being around too much, and if you become a burden on them even more so.
Situations where your daughter might get into, that she can't go to work, because you're sick.

I know I sound rough - but if you ever need that $90K back because of emergencies, - well it won't be there anymore.

 

[dilligaf]

You have a point More. Dave, maybe you should sit down with both of your kids (and what's his name ) and have a family discussion about this so there are no questions unanswered.

 

[pickup]

pickup, that is the biggest question I have---what would be the best way to transfer the money to them? It may be smarter to do the transfer in annual installments rather than in a lump sum.

island, I do not plan on living with them. This would be their property--I would simply be a tenant.

moreluck--excellent point. This may be another good reason to do the transfer in annual installments rather than a lump sum.

Sounds like a phone call to Dave Ramsey might be in order.