Should we buy mom's house/property and build beside her?
August 8, 2018 12:22 PM Subscribe
Mom owns a house and significant acreage. She's asked if we're interested in buying her out and building on property as well. We want to do this, but want to consider all possibilities/problems. What are we missing?
My mom owns a beautiful parcel of land with a quirky house that she and my dad built back in the 1980s. It's a 80+ acre parcel has been allowed to go "back to nature", and has no other significant building/development potential as most of it is in the floodplain. There is no mortgage.
My dad passed away about 10 years ago, and my mom has continued to live in the house and maintain it with some help from me. She's 70 now, but is still healthy and wants to live there as long as possible.
My wife and I want to build a house, and my mom's property has a great location and ample space to build the house we want without tearing down mom's. My mom has expressed interest in us buying her out so that the property can remain in the family. I don't know what she intends to do with the money, but I suspect she will save it.
My sister and her husband bought an adjoining parcel of property from my parents years ago and have built their own home on that. They have been asked about buying her out, but aren't able to. Complicating factor, they tend to use mom's property as an extension of theirs, which we'd need to have a discussion about.
There are lots of advantages to this situation: we're close to mom if she needs help, the property stays in the family and is able to be used by all, we get a great building site that would be hard to find on the open market. But are we ignoring any major pitfalls?
What's fair and what's the best way to go about it? Do we offer her fair market value and then rent the house back to her as long as she wants to live in it? What do we do with the house when she's gone? It's a non-standard, log cabin design that will be difficult to sell/rent, and the "fair market value" given by tax assessment may not be accurate. Do we ask for a discount with the understanding she can live in the home rent free for as long as she needs to? What if she outlives one of us and we need to sell the property? Are there tax/medicare implications for her if she sells her home? In the words of Don Rumsfeld, what don't we know that we don't know? And who do we talk to to move this forward? A lawyer? A mortgage lender? Anybody else have direct experience doing something like this?
My mom owns a beautiful parcel of land with a quirky house that she and my dad built back in the 1980s. It's a 80+ acre parcel has been allowed to go "back to nature", and has no other significant building/development potential as most of it is in the floodplain. There is no mortgage.
My dad passed away about 10 years ago, and my mom has continued to live in the house and maintain it with some help from me. She's 70 now, but is still healthy and wants to live there as long as possible.
My wife and I want to build a house, and my mom's property has a great location and ample space to build the house we want without tearing down mom's. My mom has expressed interest in us buying her out so that the property can remain in the family. I don't know what she intends to do with the money, but I suspect she will save it.
My sister and her husband bought an adjoining parcel of property from my parents years ago and have built their own home on that. They have been asked about buying her out, but aren't able to. Complicating factor, they tend to use mom's property as an extension of theirs, which we'd need to have a discussion about.
There are lots of advantages to this situation: we're close to mom if she needs help, the property stays in the family and is able to be used by all, we get a great building site that would be hard to find on the open market. But are we ignoring any major pitfalls?
What's fair and what's the best way to go about it? Do we offer her fair market value and then rent the house back to her as long as she wants to live in it? What do we do with the house when she's gone? It's a non-standard, log cabin design that will be difficult to sell/rent, and the "fair market value" given by tax assessment may not be accurate. Do we ask for a discount with the understanding she can live in the home rent free for as long as she needs to? What if she outlives one of us and we need to sell the property? Are there tax/medicare implications for her if she sells her home? In the words of Don Rumsfeld, what don't we know that we don't know? And who do we talk to to move this forward? A lawyer? A mortgage lender? Anybody else have direct experience doing something like this?
You need to talk to a CPA who has a specialty in senior issues. There would potentially be tax/Medicare implications for a sale, but also potential tax implications for a below-market or rent-free lease-back. I don't think they're insurmountable, but I'm not an expert and you definitely want to understand the details.
Additionally, with a "log cabin" style house you may have a lot of difficulty obtaining a mortgage. You'll want to figure out whether it's currently up to code for your jurisdiction, which may have a big impact on how you'd want to use it after your mom's gone.
posted by praemunire at 12:44 PM on August 8, 2018
Additionally, with a "log cabin" style house you may have a lot of difficulty obtaining a mortgage. You'll want to figure out whether it's currently up to code for your jurisdiction, which may have a big impact on how you'd want to use it after your mom's gone.
posted by praemunire at 12:44 PM on August 8, 2018
I'll be the first one to say it - you need to talk to a lawyer who specializes in real estate.
When you are figuring things out, you also need to think not only about what happens if your mother dies, but what happens if she develops dementia and has a guardian who is not you. If a guardian is making decisions for your mom, you might be able to keep agreements you had with her initially, but you also might spend thousands of dollars on lawyers defending her wishes, The guardian gets to use your mom's money for whatever he/she claims is in your mom's best interest, even if it has nothing to do with what your mom wanted. Ask me how I know.
posted by FencingGal at 12:50 PM on August 8, 2018 [8 favorites]
When you are figuring things out, you also need to think not only about what happens if your mother dies, but what happens if she develops dementia and has a guardian who is not you. If a guardian is making decisions for your mom, you might be able to keep agreements you had with her initially, but you also might spend thousands of dollars on lawyers defending her wishes, The guardian gets to use your mom's money for whatever he/she claims is in your mom's best interest, even if it has nothing to do with what your mom wanted. Ask me how I know.
posted by FencingGal at 12:50 PM on August 8, 2018 [8 favorites]
Have you considered the alternative of subdividing the parcel and only buying as much land as you'd need/want to build a new house for yourself plus whatever other rural acreage dreams you may have (or as needed to meet minimum acreages requirements if there are those kinds of development restrictions in your zoning area). Your mom would remain as owner of her house/most of the land to be divided equitably as a regular inheritance when she passes. Even in rural areas, it's not always possible to build a full-scale second home on a single deeded parcel, and subdividing now seems like it would bypass quite a few potential headaches. Alternatively, you could subdivide so that mom's house is on the smaller parcel if there's a way to site things so that you could eventually sell off mom's house and a small piece of land when you no longer need it for housing mom, without giving up most of the land if you want to keep it long run for recreational/aesthetic purposes.
posted by drlith at 12:59 PM on August 8, 2018 [10 favorites]
posted by drlith at 12:59 PM on August 8, 2018 [10 favorites]
Yeah, you want a professional to review your particular information and case here. The big red flag/question i got from reading your description is your being unsure of what she wants to do with the proceeds of the sale - from your writing it doesnt appear she "needs" them for any current cost.
If i may make an attempt at reading the subtext here it doesnt seem like your concern is for fairly compensating your mom but making sure your sister who bought land next door is treated fairly? She and her husband bought that land, but did they get a worse deal because they bought it at market rates? is there a sense that your sister is owed half or whatever the appropriate share of the proceeds from the sale of your moms land? there may be ways to achieve your goals (allowing you to build, creating a sense that everyone was dealt with fairly) that do not require an outright sale.
Depending on the value of the land relative to the purchase price there could be tax consequences for your mom - if you pay market rate she could potentially owe capital gains taxes (there is a sizable credit so its impossible to say without more info whether this is the case) if she sells for less than market rate that could potentially count as a gift (which could, itself, cause tax liability for you as the recipient of the gift). One thing i know for sure is that if your mom held onto the land until she died there would be no tax liability to you when you inherited it, for tax purposes its value is updated to the market value on the day it passes to you.
As praemunire said this is a complex situation and you should seek qualified professional advice, but equally important would be getting a firmer grasp on what outcomes youre actually looking for here.
posted by Exceptional_Hubris at 1:01 PM on August 8, 2018 [2 favorites]
If i may make an attempt at reading the subtext here it doesnt seem like your concern is for fairly compensating your mom but making sure your sister who bought land next door is treated fairly? She and her husband bought that land, but did they get a worse deal because they bought it at market rates? is there a sense that your sister is owed half or whatever the appropriate share of the proceeds from the sale of your moms land? there may be ways to achieve your goals (allowing you to build, creating a sense that everyone was dealt with fairly) that do not require an outright sale.
Depending on the value of the land relative to the purchase price there could be tax consequences for your mom - if you pay market rate she could potentially owe capital gains taxes (there is a sizable credit so its impossible to say without more info whether this is the case) if she sells for less than market rate that could potentially count as a gift (which could, itself, cause tax liability for you as the recipient of the gift). One thing i know for sure is that if your mom held onto the land until she died there would be no tax liability to you when you inherited it, for tax purposes its value is updated to the market value on the day it passes to you.
As praemunire said this is a complex situation and you should seek qualified professional advice, but equally important would be getting a firmer grasp on what outcomes youre actually looking for here.
posted by Exceptional_Hubris at 1:01 PM on August 8, 2018 [2 favorites]
My brothers and and I share a set of family properties with significant value. I'm afraid the first thing I'd suggest you all do is talk to a good land lawyer, hopefully all together.
1/ What are your local permits like? Can you have two residences on a single lot? Will you have to sever off to put up a second dwelling, or are "Carriage houses" or "Granny flats" allowed in your locality?
2/ What is your strategy to deal with taxes? Capital gains, in particular. There are methods to manage this, but that's so dependent on the laws you work under. Our lawyers helped structure an arrangement that transferred the properties from our parents to us minimizing our tax issues. That took planning and a considerable length of time, but it saved us/mom and dad a lot of taxes. It involved a severance and a merger of title, as well as a long period of shared title between us and our parents.
3/ In terms of your sister's usage, that doesn't have to be either or. You can define easements and rights for the various properties. That's the formal way. the informal way is simply to come to a word-of-mouth agreement. This is how our family handles things, and it's worked for the better part of a decade now because we generally agree and get along. There are tools here that could help you if you want to use them.
We've been through all of these things. It wasn't cheap or quick to deal with all of these, but going slow meant we did it right, got buy in from everyone at every step, and ultimately avoid probate or a high tax bill in the future.
posted by bonehead at 1:06 PM on August 8, 2018 [2 favorites]
1/ What are your local permits like? Can you have two residences on a single lot? Will you have to sever off to put up a second dwelling, or are "Carriage houses" or "Granny flats" allowed in your locality?
2/ What is your strategy to deal with taxes? Capital gains, in particular. There are methods to manage this, but that's so dependent on the laws you work under. Our lawyers helped structure an arrangement that transferred the properties from our parents to us minimizing our tax issues. That took planning and a considerable length of time, but it saved us/mom and dad a lot of taxes. It involved a severance and a merger of title, as well as a long period of shared title between us and our parents.
3/ In terms of your sister's usage, that doesn't have to be either or. You can define easements and rights for the various properties. That's the formal way. the informal way is simply to come to a word-of-mouth agreement. This is how our family handles things, and it's worked for the better part of a decade now because we generally agree and get along. There are tools here that could help you if you want to use them.
We've been through all of these things. It wasn't cheap or quick to deal with all of these, but going slow meant we did it right, got buy in from everyone at every step, and ultimately avoid probate or a high tax bill in the future.
posted by bonehead at 1:06 PM on August 8, 2018 [2 favorites]
I purchased my mom's property years ago. The deal we cut was a decent discount from fair market value with the understanding that she'd live the rest of her days in the home with me.
The advantages to mom:
The security of staying in familiar and cherished surroundings as long as she lives.
No longer having to deal with the maintenance and upkeep.
Having cash (from the sale) to enable herself to travel and have fun.
Not having to pay a sales commission to an agent - we just hired a lawyer to review the sales documents and offer advice. That was only a few hundred dollars, so the commission savings was considerable.
The advantages to me:
Getting a nice property that I'd otherwise never be able to afford, thanks to the family discount.
Using the "gift of equity" (as the discounted value was termed) as my down payment.
Getting qualified for a mortgage that (even with the discounted sale price) I still didn't financially qualify for, because the underwriters reviewing my application decided that our keep-it-in-the-family plan made me a good risk.
The lawyer was also helpful for me, when the title company got into my face about certain legal documents I'd filled out pertaining to the sale - a conference call with the lawyer got them sorted out fast (i.e., they were wrong, I'd done it correctly).
Buying a property that I knew well, meaning it had no unplea$ant $urprises in store (hah! the house: It knows).
Qualifying for head of household tax filing status, since I was now providing mom with more than 50% of her support by providing her with housing and food.
It's been twenty-two years and it's worked out so well, one of my brothers and one of my sisters have made similar deals with kids of their own. So I'd encourage you to move forward on this.
Like I said, buying at a discounted price with the understanding that you'll then let her stay on the property rent-free gives you financial and tax advantages, as opposed to paying full price then charging rent, which would count as additional income to you. But run the proposal past your tax person for feedback.
As for potential Medicaid issues: if your mom ends up needing long-term nursing home care, she'll first have to spend down her assets before she qualifies for Medicaid. Assuming she sells the property, she'd have the cash that'd have to be spent down. A popular work-around to this, for families who want something to inherit, is to establish a family trust and put the parents' property/proceeds from sale, and any other assets of substantial value, into the trust. This has to be done at least several years before a potential Medicaid claim arises, so if that's how you and she decide to do it, best to move quickly. The families I know who've used this option put the kids in charge of the trust, so after their parents are gone, they can deal with the assets in the trust as they wish. The disadvantage is when the kids can't agree what to do. I have an aunt and uncle who died over a decade ago; their home stands empty, the family trust paying the taxes, utilities, and maintenance, while their adult kids continue to fight over what to do with it. Talk about diminishing returns...
posted by Lunaloon at 1:19 PM on August 8, 2018 [5 favorites]
The advantages to mom:
The security of staying in familiar and cherished surroundings as long as she lives.
No longer having to deal with the maintenance and upkeep.
Having cash (from the sale) to enable herself to travel and have fun.
Not having to pay a sales commission to an agent - we just hired a lawyer to review the sales documents and offer advice. That was only a few hundred dollars, so the commission savings was considerable.
The advantages to me:
Getting a nice property that I'd otherwise never be able to afford, thanks to the family discount.
Using the "gift of equity" (as the discounted value was termed) as my down payment.
Getting qualified for a mortgage that (even with the discounted sale price) I still didn't financially qualify for, because the underwriters reviewing my application decided that our keep-it-in-the-family plan made me a good risk.
The lawyer was also helpful for me, when the title company got into my face about certain legal documents I'd filled out pertaining to the sale - a conference call with the lawyer got them sorted out fast (i.e., they were wrong, I'd done it correctly).
Buying a property that I knew well, meaning it had no unplea$ant $urprises in store (hah! the house: It knows).
Qualifying for head of household tax filing status, since I was now providing mom with more than 50% of her support by providing her with housing and food.
It's been twenty-two years and it's worked out so well, one of my brothers and one of my sisters have made similar deals with kids of their own. So I'd encourage you to move forward on this.
Like I said, buying at a discounted price with the understanding that you'll then let her stay on the property rent-free gives you financial and tax advantages, as opposed to paying full price then charging rent, which would count as additional income to you. But run the proposal past your tax person for feedback.
As for potential Medicaid issues: if your mom ends up needing long-term nursing home care, she'll first have to spend down her assets before she qualifies for Medicaid. Assuming she sells the property, she'd have the cash that'd have to be spent down. A popular work-around to this, for families who want something to inherit, is to establish a family trust and put the parents' property/proceeds from sale, and any other assets of substantial value, into the trust. This has to be done at least several years before a potential Medicaid claim arises, so if that's how you and she decide to do it, best to move quickly. The families I know who've used this option put the kids in charge of the trust, so after their parents are gone, they can deal with the assets in the trust as they wish. The disadvantage is when the kids can't agree what to do. I have an aunt and uncle who died over a decade ago; their home stands empty, the family trust paying the taxes, utilities, and maintenance, while their adult kids continue to fight over what to do with it. Talk about diminishing returns...
posted by Lunaloon at 1:19 PM on August 8, 2018 [5 favorites]
What's your relationship like with your sister and her husband? I sensed a little tension in your complicating factors comment. This is relevant because you are going to be close neighbours and after your mum finally passes their will be the estate to think about. Were they expecting to get half the land when she passes so they could expand into the land they're using now? How would you feel if they get of your mothers money, yes even the money you paid her for the land? What were your family dynamics like as a family when you were kids because that's the dynamics you'll be bringing to this arrangement. Whatever you do use lawyers get every i dotted & t crossed.
posted by wwax at 1:39 PM on August 8, 2018 [3 favorites]
posted by wwax at 1:39 PM on August 8, 2018 [3 favorites]
The checking that you can actually build there and the lawyer angle have been covered pretty well above -- and definitely do those things.
the property stays in the family and is able to be used by all
they tend to use mom's property as an extension of theirs
What if she outlives one of us and we need to sell the property?
You should think really really hard about if you want this property to be a family thing that is going to be passed down the generations and "stay in the family" and what that really means for your relationships with other family members and for yourselves. You might not be able to sell the property if you need money for something else later without it having consequences in how you relate to your family.
Is this property you will pass on to your children? What headaches will they incur by owning this "stay in the family" property, especially if they want to live far from it, perhaps even in another country? How can the property be protected from any judgments against the owners? (If the answer to that isn't obvious you need to bring that up with the lawyer) If there are multiple children who will co-own it, will they all get along?
Also, since the intention is for it to stay "in the family", I notice you say "we" so if you are married you need to consider what would happen in the event of a divorce. Consider what would happen if one of you died and the surviving one of you later remarried, then was survived by the new spouse. Consider what would happen if the surviving spouse was NOT the person related to the mother... would "the family" still consider them family, or would they have hostile neighbors who saw them as occupying land that should be theirs because it stays "in the family".
Some of this can be done legally, some of it needs to be done with ongoing emotional labor.
A mortgage lender?
Obviously there's a lot of end of life financial planning issues to consider, but it's possible it might make more sense to keep the interest on the loan "in the family" as well if mom doesn't need a lump sum.
posted by yohko at 1:44 PM on August 8, 2018 [3 favorites]
the property stays in the family and is able to be used by all
they tend to use mom's property as an extension of theirs
What if she outlives one of us and we need to sell the property?
You should think really really hard about if you want this property to be a family thing that is going to be passed down the generations and "stay in the family" and what that really means for your relationships with other family members and for yourselves. You might not be able to sell the property if you need money for something else later without it having consequences in how you relate to your family.
Is this property you will pass on to your children? What headaches will they incur by owning this "stay in the family" property, especially if they want to live far from it, perhaps even in another country? How can the property be protected from any judgments against the owners? (If the answer to that isn't obvious you need to bring that up with the lawyer) If there are multiple children who will co-own it, will they all get along?
Also, since the intention is for it to stay "in the family", I notice you say "we" so if you are married you need to consider what would happen in the event of a divorce. Consider what would happen if one of you died and the surviving one of you later remarried, then was survived by the new spouse. Consider what would happen if the surviving spouse was NOT the person related to the mother... would "the family" still consider them family, or would they have hostile neighbors who saw them as occupying land that should be theirs because it stays "in the family".
Some of this can be done legally, some of it needs to be done with ongoing emotional labor.
A mortgage lender?
Obviously there's a lot of end of life financial planning issues to consider, but it's possible it might make more sense to keep the interest on the loan "in the family" as well if mom doesn't need a lump sum.
posted by yohko at 1:44 PM on August 8, 2018 [3 favorites]
Your Mom needs a lawyer who understands Social Security & Medicaid very, very well. The proceeds should almost certainly go into a trust, but it has to be done correctly.
With your sibling, you sound like yo understand the concerns; don't ignore those concerns.
posted by theora55 at 1:54 PM on August 8, 2018
With your sibling, you sound like yo understand the concerns; don't ignore those concerns.
posted by theora55 at 1:54 PM on August 8, 2018
Since you mention that most is on a flood plain, is there an area that is higher? Flood insurance and maybe mortgages could be problematic if you build there.
posted by Botanizer at 1:59 PM on August 8, 2018 [5 favorites]
posted by Botanizer at 1:59 PM on August 8, 2018 [5 favorites]
The way the weather’s going these days, I personally think it’s not a great idea to be pouring your family assets into new construction on a flood plain.
posted by Andrhia at 6:25 AM on August 9, 2018
posted by Andrhia at 6:25 AM on August 9, 2018
Response by poster: Thanks everybody, these answers are all helpful. Just to clarify, possible building site and mom's current house are well out of floodplain, but the majority of acreage is in the river bottoms, and not suitable for development. This means value of the land is lower, and not suitable for subdivision.
posted by cosmicbandito at 9:55 AM on August 9, 2018
posted by cosmicbandito at 9:55 AM on August 9, 2018
« Older How do I persuade my husband to see his doctor? | Is it reasonable to build a new driveway on top of... Newer »
This thread is closed to new comments.
posted by humboldt32 at 12:28 PM on August 8, 2018 [3 favorites]