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Rental property advice needed - 7/4/2008 10:18:25 PM
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meg4
Posts: 204
Joined: 4/21/2005
From: North Georgia
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I have a house that I have rented out since my children and I moved out of it about nine years ago. I have never kept the rent money separate from my other money like you would a business, I just used it for living expenses while raising my kids. Now my two oldest children are married, and one of my daughters and her husband and baby would like to move back to our hometown and rent or buy the house. I just don't know if I should treat them like any other tenant as far as finances goes, or if I should do something different.
I own the rental house on ten acres of land and the house I live in now on about four acres of land, which someday will be split among my four children. It would seem strange selling or renting to my children a house that they would inherit someday, but I'm not really ready to divide up the properties and give it to them just yet because they are all so young (one still in high school and one just graduated). I also want all of them to get a fair share of what I have. I thought about keeping the rental money in a separate account and using that to pay expenses on the property such as taxes and maintenance, and whatever profit there is could eventually be divided among the kids. Income tax on that would probably have to be handled differently than the way I do it now.
Does anyone have experience with this sort of thing, or any ideas on the best way to handle this? Would it be better to put the property in a trust for the family? Any advice would be greatly appreciated!
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RE: Rental property advice needed - 7/5/2008 7:59:24 AM
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FreeEagle
Posts: 26
Joined: 7/2/2008
From: Minnesota
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First I would say that no mater what you do, make sure you have all of your plans laid out in a will or trust. Your will is your love letter to those you leave behind. I feel it's great when a parent can help their children with a home, but as you mentioned rent/sell / how do you rent /sell something their going to inherit.
I would first raise the question - Are the four children going to each receive 1/4 of the actual land or 1/4 the $ from the sell of the land? If actual land then they would have the right to move onto and live there themselves. If $, then they are obligated to sell, in order to actually receive.
The second question is - Is there a loan against the property? - if so upon your passing, this could force the sell of the property to pay the lender off. Which if sold this way could bring far less then it's real value.
My grandfather had 320 acres of farm land. Upon the marriage of his three kids, they were offered a chance to purchase one fourth of the land to start their own farm. My father and my uncle each took him up on the offer and each bought 80 acres. My aunt declined the offer, and moved on to another farm with her husband. So Grandpa kept the reminding 160 acres, even though he only farmed 80. Now I don't know all the details, but I think the land was appraised at the time of their marriage, Grandpa discounted the appraisal, and at some point they needed to take out a loan to purchase the land.
Fast forward 25 years. Within a few years after purchasing and building his farm my dad died from a fatal hunting accident. Mom lost (80 acres) the farm to the bank. When I was 18 or 19 my uncle filed papers to take legal guardianship over my Grandfather. Claiming Grandfather was not taking care of the farm and bills properly. By this time, we lived several hundred miles away, and my uncle was still neighbors to Grandpa. Now at this time Grandpas farm was paid for. He was still farming, so he had cattle feed and other general operation expenses. Based on my uncles testimony of my Grandfathers health, the court granted my uncle guardianship, without even having Grandpa there.
After the hearing, while we were visiting with Grandpa, he told us that my uncle had asked him to mortgage his farm (Grandpa's) because my uncles credit was bad. When Grandpa told him no, that's when my uncle came up with the stories of Grandpa not being able to take care of things. We came to the realization that the only reason my uncle wanted guardianship, was so he could mortgage Grandpa's farm to finance his own expense and desires. We began to contact an attorney to reverse the guardianship, and to get a will into place. A few days before our appointment, Grandpa passed away.
End result, a year and a half of probate, between the state and the attorney's they took half of Grandpa's estate, my aunt gave her share of inheritance to my uncle, and us 6 kids each received 1/6 of my dad's share. By state rules, it didn't go to mom, a will would have changed this.
Now back to your daughter. If you're renting the property to your daughter, do so with the same rules you'd have for a non family member, the amount may be less, but the rules should be the same. Should you decide to sell her the property, be sure to clearly what happens upon your passing, or in the event she divorces, or if something happens to her. Does her husband take over? And what if he remarries? It would be best if you sold them the property where they had paid you're asking price now. How would you feel about buying/renting a property, doing repairs and upkeep, only to divide it among your siblings? Put it all in writing.
As far as the money goes, it's all part of your estate - the kids can decide to pay off the house with their share, or continue to rent from the estate. Their rent would just be less their share of inheritance. On the other hand, you're own situation may change, and you might spend their inheritance, what's left is what it is.
If everything you own is in a trust, no one really owns anything, they just control it, upon you're passing there is no inheritance, just a transfer of the trustee (from yourself to your kids, or an appointed child). There by there is no tax paid, until the trustee's (all your kids) decide to sell something from the trust.
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RE: Rental property advice needed - 7/7/2008 10:26:36 PM
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meg4
Posts: 204
Joined: 4/21/2005
From: North Georgia
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Thanks for the replies. The property is paid for, so there is no mortgage. The only expenses are maintenance and property taxes. It really needs some remodeling and repairs, and will probably need a new roof in a few years. They could possibly do the repairs in exchange for rent.
I am thinking of putting it in a trust, but I'm too tired to think about it right now.
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RE: Rental property advice needed - 7/7/2008 11:01:01 PM
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APZR
Posts: 778
Joined: 4/18/2005
From: GA
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I say rent it at market rate and use the $$$ to maintain what you have. If you have excess and want to stuff it aside for your kids, that's great. But if you discount the rent for one child, and don't offer something for the others, there WILL be a riff later on. Seen it in my own family, got that merit badge.
_____________________________
Ya can't keep trouble from visitin, but you don't have to offer it a chair.
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RE: Rental property advice needed - 7/8/2008 4:03:19 PM
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BlueAdept
Posts: 84
Joined: 4/18/2005
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I guess one question I have is; if you offer the house for no rent to one child, could you give the same offer to each of the other kids as well?
You have indicated you want each child to get their fair share, but can you do that if you give one a benefit that the others could not receive?
Better to charge a fair market rent, bank the funds and the divide them between the children.
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RE: Rental property advice needed - 7/9/2008 10:54:35 AM
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blessedinnyc
Posts: 1672
Joined: 10/12/2007
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quote:
ORIGINAL: meg4
I have a house that I have rented out since my children and I moved out of it about nine years ago. I have never kept the rent money separate from my other money like you would a business, I just used it for living expenses while raising my kids. Now my two oldest children are married, and one of my daughters and her husband and baby would like to move back to our hometown and rent or buy the house. I just don't know if I should treat them like any other tenant as far as finances goes, or if I should do something different.
My family owns a cottage in Wisconsin that we would use while we were on vacation. When my aunt decided to move to that neck of the woods, we rented the house out to her for the cost of maintenance and property taxes- provided that we could use it on the weekends as well. It worked out great for all of us.
quote:
I say rent it at market rate and use the $$$ to maintain what you have. If you have excess and want to stuff it aside for your kids, that's great. But if you discount the rent for one child, and don't offer something for the others, there WILL be a riff later on. Seen it in my own family, got that merit badge.
This is an excellent point. My parents sent me to state school but can now afford to send the little one to private school (IE: an Ivy League). If I weren't such a wonderful son, I would expect them to help me pay for grad school.
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RE: Rental property advice needed - 7/9/2008 11:15:00 AM
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GroupW
Posts: 2129
Joined: 11/16/2007
Status: offline
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quote:
ORIGINAL: FreeEagle
First I would say that no mater what you do, make sure you have all of your plans laid out in a will or trust. Your will is your love letter to those you leave behind. I feel it's great when a parent can help their children with a home, but as you mentioned rent/sell / how do you rent /sell something their going to inherit.
The second question is - Is there a loan against the property? - if so upon your passing, this could force the sell of the property to pay the lender off. Which if sold this way could bring far less then it's real value.
Definite yes on the will/trust.
Also, consider inheritance taxes (not up to date here anymore, so "buyer beware"). If you're in a position to potentially owe it or need cash to pay off debt that's due on sale, leaving your kids property without the means to pay the inheritance tax can also force a sale of assets. In some cases, people use life insurance policies to cover these possibilities. It's not a cheap option, but it's an option.
Definitely explore the trust with a lawyer that's licensed to practice in your state - there are several reasons why this could make sense and limit the amount of brain damage your heirs would need to go through.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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RE: Rental property advice needed - 7/9/2008 9:50:05 PM
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meg4
Posts: 204
Joined: 4/21/2005
From: North Georgia
Status: offline
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Yes, I've heard that a trust is better than inheritance because of the taxes associated with inheritance.
Thanks for all the replies......more to think about. I like seeing all the different perspectives.
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RE: Rental property advice needed - 7/15/2008 5:44:49 PM
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christsstar
Posts: 4598
Joined: 4/8/2005
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Inheritance tax varies depending on where you live.
definitely get will/trust/etc in order ... whether you rent to kids or stranger.
I think it's most-fair to rent at market value.
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RE: Rental property advice needed - 7/16/2008 7:34:17 AM
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FreeEagle
Posts: 26
Joined: 7/2/2008
From: Minnesota
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Yes trust is better! They tax you to death while you're living, then they want a share of everything you leave behind. How can I get my inheritance from Uncle Sam? In most states you can give (tax Free) $10,000 - $12,000 to each of your kids, per year, before your death.
A friend of mine in his 70's, after his mother passed away - the land in which his farther worked, and paid taxes on from the early 30', was paid off, but the 3 kids inherited it, but no will was in place. After probate, and the IRS, looking at this prime Real Estate (the farm land is now in a major commercial development area, worth $125,000 per acre), taxed the inheritance at the commercial rate - they did not even tax it or grandfather it in, as farm stead. The boys had to take a loan for 1.2 million, just to pay the taxes to keep the land their Father and Mother gave (left) them. Put your WILL in place! and keep it updated.
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RE: Rental property advice needed - 7/16/2008 8:26:42 AM
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victorburek
Posts: 7
Joined: 7/7/2008
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In addition to the $12,000 you can give to anyone per year, you also have $1.5 mil you can also give away with no taxes. It is like you have 2 checkbooks. One check book allows $12,000 per person as many as you want to give, the other check book allows you to give away $1.5 million over your life. So, you can give one child $1,512,000 in one year with no tax consequences. I am a Certified Mortgage Planner that deals with gifts for downpayments quite often and this subject comes up. Now, of course, check with your CPA.
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RE: Rental property advice needed - 7/16/2008 12:58:22 PM
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BlueAdept
Posts: 84
Joined: 4/18/2005
Status: offline
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You can give any 1 person 12000 a year, without hitting an issue with the FEDERAL estate taxes. However that 12000 a year is accumlated against the max of 1.5 million. So should you give 125 people 12000 each, the 126 person you give to would trigger estate tax issues. Likewise if you give 12000 to 13 people for 10 years, in the 10th year the estate taxes are going to hit you (not the giver). Since you would have hit the max transfer at 1.5M.
Now I have no clue how someone would figure out that they gave over that amount, but I suspect that the IRS would go digging at some point to figure out there are estate taxes due.
The tax issues are always on the giver, never on the reciever.
Freeeagle - it sounds like your friends need to get a estate attorney involved. As I recall my tax classes, the land should have transferred at the purchased value. Since that is what the value is according to the estate. It has been a few years since I took the tax classes, and I don't work in that area of accounting. So changes in the practice could have come out and I would not be aware of them.
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