Best way to do this? - Posted by SteveG_Pa

Posted by SteveG_Pa on August 29, 2003 at 04:33:55:

Ok Ron, all cleared up now, thanks alot, thats the info I was looking for.

Best way to do this? - Posted by SteveG_Pa

Posted by SteveG_Pa on August 28, 2003 at 08:53:45:

Hi everyone, heres my question. Elderly lady, 76 years young has a nice house in a nice neighborhood, she has NO family anywhere left, she loves my wife and I and wants to sell us her house because she cant keep up with the taxes (free and clear house)plus all her bills, she also has alot of medical problems (only gets $561 mth SSI) she doesnt want to leave her house to escheat when she goes, but she doesnt want to leave her house, she grew up there and took it from her parents, plus, she doesnt want to live in a home and give up her 2 cats.
So I was wondering what the best way is to buy her house so she can stay there till she passes. My wife told her a little about a life estate and she was interested, since she was also told about a reverse annuity mortgage, she knew she would be signing the deed over to us, then given a life estate to revert to us when she goes, but what about a land trust or any other way that would be better to accomplish the same idea? We told her wed give her a few hundred every month to cover her taxes and payments from us, plus, she could stay there, we all know she doesnt have to many more years left. The house is worth about 55K, already in rentable or L/O condition.
If you can give me some insight to pitfalls, tax issues and such would be greatly appreciated also, Thanks

SteveG_Pa

Re: Best way to do this? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 28, 2003 at 11:33:00:

Steve G–(PA)------------

First, I suggest you read an article about dealing with older property owners. Read this URL: http://www.creonline.com/money-ideas/mm-061.html

Just highlight it, do control c to “copy” then control v to place it in the address of your browser. Then go to it.

It may be that there are some retirement homes where she could have her two cats. That is something to explore, I would think.

What you are proposing to do sounds like a “reverse mortgage.” The “reverse annuity mortgage” you mention may be a subcategory of reverse mortgages, I know that there are two or three.

The risk you take is that she lives a long time and you pay too much for the property, with no income from it. I doubt that the appreciation would make up for the money you lay out each month. It might be better for her to get such a reverse mortgage from a commercial lender, which is prepared to take the risk of a long-lived borrower because of having lots of loans. Then, she can will the property to you and your wife after she dies.

You would probably be the personal representative of her estate, and sell the property to pay off the reverse mortgage. Any money left over would go to you. Or, you would get a loan secured by the property, use that to pay off the reverse mortgage, and retain the property, albeit with a mortgage against it.

When you inherit property, the basis of the property is set at the market value at the time of the death of the person from whom you inherited it. Thus, were you to resell after the woman’s death, you would likely have little or no tax to pay on the income. If you hold the property as a rental, there would be no taxable event, so no tax to pay.

You say: “…then given a life estate to revert to us when she goes, …” Excuse me for being picky, but technically, her life estate does not “revert” to you. What happens is that it ends upon her death and then, as the holders of the “remainder estate” or as “remainderman (or folk)” you become the sole owners of the property.

Also, I am confused by this: “We told her wed give her a few hundred every month to cover her taxes and payments from us, … .” I wonder if you just misspoke?

You could buy the property from her, with a loan secured against the house, you the borrowers, her the lender. Then your monthly payments to her would be payments on the loan. This is be tax deductable, I believe for you. It would provide her with income, some of which would be taxable as being interest on the loan. If she then paid you some rent, that would be taxable to you, but necessary, I believe, for you to be able to deduct the interest on the loan as being investment interest. If you don’t charge her rent, you can’t, if I understand the IRS rules properly, deduct the interest on the loan. I encourage you to talk to an accountant about these issues, as I may be mistaken.

Then, when she dies, she could forgive the rest of your debt in her will.

Good InvestingRon Starr

Re: Best way to do this? - Posted by SteveG_Pa

Posted by SteveG_Pa on August 28, 2003 at 16:47:20:

Yes Ron I think you may have misunderstood our position here, when I said the house would revert back to us, that was because she was going to just basicly gift us the house, then wed let her stay there and collect a cash payment from us till she passes, as a stated in my first message, nobody thinks she’ll be around much longer, she has a rare blood disease that she has to go to the doctors everyday for. I was mostly curious if its better to have her give us the house, then give her a life estate in it, that would revert back to us without probate, or use a land trust with us as the beneficiary, to go to us when she passes? Or is there another way? After talking to her many times (my wife drives the Lift bus that takes her to the doctors) we’d really like to let her live there, we figure if she gets 2500 a year from us, thats 25K if she lives 10 years, which sadly she probably wont, we help her stay in her house, she helps us get her house cheap.
Maybe we could get the deed, then take a loan out or something, give her a chunk to do something with or something? Just looking for ways to do this on the cheap as far as taxes go to. Thanks for the reply

SteveG_Pa

Re: Best way to do this? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 28, 2003 at 23:02:38:

Steve G–(PA)---------

Please reread what I wrote earlier. If you don’t understand, please let me know so I can clarify.

No, a gift is not a good idea. Taxes is the reason.

Willing is a good idea. Her putting it in a trust, with her as the beneficiary and then you being successor beneficiaries is a good idea. Taxes is the reason.

The trust is actually probably a little better than the willing. The reason: not have to go through probate–saves time and money.

Deeding to you, carrying back a loan that you pay on is good. Reason: not a taxable event for you. If she forgives the loan in her will, not a taxable event for you.

Good investingRon Starr******