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Early SS Withdrawal or Inherited home?
Old 07-04-2020, 09:21 AM   #1
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Early SS Withdrawal or Inherited home?

Here is the scenario:

Target Budget: ~$80,000
DH retired, turns 70 this August
I would like to retire next year. I will be 63.

2021 projected retirement income/budget
Taxable SS (DH) $20,574
Pension (DH) $31,000
Divs-misc (2019) $3,000
RMD-DH (2022-23) $ 12,000
AGI $66,574
Std. Ded. -$26,100
= Taxable Income $40,474
CG/Fed Tax cap -$80,000
Wiggle Room $39,526

Addl Income needed
To meet budget $13,426
($66,574 + $13,526 - $80,000)

I have several options in front of me and could use some input on what the best thing to do is.

1) I start early withdrawal SS at age 63 in 2021 @ $17,160 (this was my original plan until I started checking on the house below) Full retirement age is 66.8, I am 62, so roughly 6.5 years to go. SS will be $24,145 at that time. Age 72 (new RMD age) = 2030, or 10 years.

I inherited a house in 2010, split 2 ways, in an LLC, valued today at $387,500. Market value TOD $50,000, remodeling costs $50,000 = $287,500 Tax basis. Potential monthly rental income = $1,800 - $2,200 ; Taxes are $3600/yr

I am 1600 miles away and currently the house is managed by my sister. My nephew lives in it, who sporadically pays rent to sister, who covers all the related bills. So this currently produces no income for anyone. If anything, sister is covering expenses. It was my understanding he was renting for a ďreduced rateĒ and my sister was being reimbursed for remodeling expenses she paid out of pocket until I just followed up on the progress. Nephew has been in house for 5 years so there is lost rental income for a period of time. Nephew is now unemployed due to Covid 19, but I donít want to kick him out. I have no expenses for this house and I am not entirely sure I should be asking for rental income, since it is in the family and I also know there is value in someone staying there 24/7. Tensions seem elevated and conversation limited. (Mother did make me pay rent when I stayed thereÖLOL). This presents some other options to withdrawing SS early.

2) Work something out with sister and nephew to pay half rent, letís say $900/month x 12 = $10,800 Ė expenses $5,000 = $5,800 / 2 = $2,900/year or $242/month. I stay in, the house appreciates and I proceed to draw SS early.

3) Remove nephew and rent full value, letís say $1800/month x 12 = $21,600/year - $5,000 expenses $16,600 / 2 = $8,308/year or $692/month. Most undesirable - this could be ugly.

4) Could it be in my best interest to ask for a buyout now, and forfeit any increase in value? If so, is there a way to minimize capital gains? At $187,500 I am pretty sure will cost me 35%.

5) I am wondering if they were to take a loan out to repay me over the course of, say 10 years, would be the smartest move. Using a mortgage calculator, $187,500 @ 0% interest over 10 years would be $1563/month, $18,756/year. This would allow me to meet budget, keeps me below the tax threshold with some room left over and allows me to delay SS withdrawals. I lose 10 years of appreciation of the home, I donít have to deal with family differences of opinion but am concerned this may put them in a bind.

6) Drop it and walk away. My sister and her children really donít have anything to do with me, so nothing would change either way.

Our current taxable income with no draws and my working salary for 2019 was $69,792 = $10,208 wiggle room for an $80,000 tax threshold, so until I retire, I donít have much wiggle room. My target retirement date is June 2021, so I could them 6-12 months to work this out.

We are intending on selling our primary residence and purchase another to complete our move out of state in 2021-2022. We are beginning that process now with the purchase of property, clearing, pole barn, etc. so we will have some costs to deal with until then.

I havenít figured any inflation and all of these figures are a rough estimate.

Thanks for reading.
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Old 07-04-2020, 09:30 AM   #2
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Sell your half of the house to your sister at fair market value. If she won't do it or can't get a mortgage to do it, insist that the house be sold. You do not need a non-performing and risky asset where you have no control and where you cannot even monitor it due to distance.

The tried and true "absent authority" negotiating tactic may take the edge off this situation. Simply tell sister that you are working with an estate planning attorney or with a financial planner and that your advisor is adamantly insisting that the house be sold. It doesn't matter if this absent authority even exists.

Edit: Re taxes remember that you got a basis step-up when you inherited. That dulls the pain. Also, absolutely do not let the tax tail wag the financial planning dog. It is the dog that you need to be concerned with.
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Old 07-04-2020, 09:33 AM   #3
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Get the house sold, you are supporting a freeloading nephew and will be supporting him for another 5 years, then another 5 years .... until he dies.

As for a buyout of the house, the LLC can mortgage out 1/2 the value and pay you off. Then the LLC can decide to up the rent to cover the mortgage or sell the place, or let it get foreclosed upon. It's not your problem or issue at that point.

You deserve to get your inheritance.

I don't see why you think the capital gains will be 35% of $187,500.
Are you claiming the rental tax-wise in your income tax (and the depreciation). Or is this all under the table. ?

<cross post with OS>
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Old 07-04-2020, 09:42 AM   #4
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+1 and +1
The house is a boat anchor.
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Old 07-04-2020, 09:45 AM   #5
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Get the house sold, you are supporting a freeloading nephew and will be supporting him for another 5 years, then another 5 years .... until he dies.

As for a buyout of the house, the LLC can mortgage out 1/2 the value and pay you off. Then the LLC can decide to up the rent to cover the mortgage or sell the place, or let it get foreclosed upon. It's not your problem or issue at that point.

You deserve to get your inheritance.

I don't see why you think the capital gains will be 35% of $187,500.
Are you claiming the rental tax-wise in your income tax (and the depreciation). Or is this all under the table. ?

<cross post with OS>
Thank you. Appreciate your opinion.

Well I am assuming this is the worst tax move to make because: 1) Taxable income goes over $80,000 (+15%) and then add another (+10%) to the current 12% Fed tax over and above $80,250.

No not claiming any rental or anything at all on my income tax. Sister is a CPA so assuming she is doing that on her returns. I haven't been provided any information whatsoever year to year about the property for about 5 years now.
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Old 07-04-2020, 09:49 AM   #6
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+1 and +1
The house is a boat anchor.
LOL thanks.
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Old 07-04-2020, 09:58 AM   #7
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+1 with others... a clean break is ideal. Tell sister that you are retiring soon and would like to sell her your half for $190k.... is she in a position to get a mortgage for $190k? At 4% that would be $907/month. Her equity would be no problem but we don't know what her income situation is. Or perhaps once nephew starts working again you sell your half to him for $190k.

Your basis should be 1/2 of the value in 2010 when you inherited it plus any capital improvements since then, so your gain shouldn't be too much. So if it was worth $300k in 2010 and you and sis put $50k into it your basis would be $175k and your gain would be $15k and the tax would be 15% of the $15k or only $2,250.

ETA: Just picked up on the fact that it is an LLC... might be easier to just sell sister or nephew a few shares of the LLC annually. You should at least be getting the LLC tax returns since you are a major shareholder.
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Old 07-04-2020, 10:01 AM   #8
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Originally Posted by klucich View Post
Thank you. Appreciate your opinion.

Well I am assuming this is the worst tax move to make because: 1) Taxable income goes over $80,000 (+15%) and then add another (+10%) to the current 12% Fed tax over and above $80,250.

No not claiming any rental or anything at all on my income tax. Sister is a CPA so assuming she is doing that on her returns. I haven't been provided any information whatsoever year to year about the property for about 5 years now.
More reason to GET OUT of it, you get zero benefit, and are losing each year whatever the $X (net amount you would get from the house) could earn per year.

(IMHO)
I don't know how an LLC would affect the taxes (would it be treated like a corp, but flow though the profit/loss to the shareholder). Either way I'm thinking something wrong is going on taxwise.
At best it's not an official rental.
If it is a declared rental, as 1/2 owner of the LLC, it seems to me this would be affecting your taxes quite a bit. Maybe your sister is taking all the benefit for herself.

In this situation, I would sell out my 1/2 as this is a horrible situation whether legal or not.
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Old 07-04-2020, 10:03 AM   #9
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... I haven't been provided any information whatsoever year to year about the property for about 5 years now.
She's a CPA?!?!?! Ack! This is not a person you need to be nice to. She is stealing from you. Hire an attorney, have him or her write a letter demanding that either the house be appraised and sister buys you out or the house is sold on the open market. Also ask for a full copy of the LLCs financial records going back the 5 years.

Include deadlines and plan to go to court to enforce your rights. You will probably have to do it.

There may be tax fraud here, too, if she has been reporting as if she was a 100% owner. Not your problem, though you may also need a CPA to sort this out and possibly even file amended returns for you.
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Old 07-04-2020, 10:03 AM   #10
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Given that you have nothing to do with sister and family, I would cut all ties with her in any way that you can.

1st, I would ask for an accounting of the last 2 years income and expenses to be certain you are getting the full story (assuming sister has such a thing and does not just make it up on the spot).

If you want to keep the house and bet on appreciation, try to convince sister to have the property evaluated and then managed by a professional. If they decide that the nephew is a deadbeat, then they will evict him and get a new qualified tenant. Problem solved. Money comes in. Not the recommended solution.

I would simply get out completely since you say you basically have nothing to do with the property and get no monetary benefit. Sell your half to sister or sell both halves outright are two options.

Another possibility might be to sell to deadbeat nephew. Expect that foreclosure is near.

Walking away (#6) would never be an option IMO. There is too much capital investment there to just give away IMO. If you feel strongly that it is an option, fill out and file a quit claim deed for your half in my name and I will deal with the mess. :>)
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Old 07-04-2020, 10:11 AM   #11
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Sounds like there is definitely a chance that your sister is ripping you off.
Get that house sold outright or let her buy you out.
Could be a pain, but too much monies are involved to walk away.
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Old 07-04-2020, 10:15 AM   #12
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...Walking away (#6) would never be an option IMO. There is too much capital investment there to just give away IMO. If you feel strongly that it is an option, fill out and file a quit claim deed for your half in my name and I will deal with the mess. :>)
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Old 07-04-2020, 10:17 AM   #13
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One other thing to consider is that as long as you are a part owner of the property, you may have exposure to liability for tort claims arising from the property (LLCs typically only shield you from contract claims). Imagine what will happen if a guest of your nephew is injured while in the house. I would compel a sale and cash out for that reason alone.
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Old 07-04-2020, 10:21 AM   #14
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+1 with others... a clean break is ideal. Tell sister that you are retiring soon and would like to sell her your half for $190k.... is she in a position to get a mortgage for $190k? At 4% that would be $907/month. Her equity would be no problem but we don't know what her income situation is. Or perhaps once nephew starts working again you sell your half to him for $190k.

Your basis should be 1/2 of the value in 2010 when you inherited it plus any capital improvements since then, so your gain shouldn't be too much. So if it was worth $300k in 2010 and you and sis put $50k into it your basis would be $175k and your gain would be $15k and the tax would be 15% of the $15k or only $2,250.
I don't think sister has much to spend. She didn't used to but is very tight lipped about her finances. She is a CPA.

I used the calculator that I didn't notice included other expenses. I don't think $907 per month is asking too much. At least one would think nephew or anyone could be paying her that much.

I thought my basis would be figured like this:

Today's market value $387,500, minus market value of the house at death, ~$50,000 = $337,500.
$337,500 minus improvements of $50,000 = 287,500.
Split two ways = $143,750 I am going to have to report as income.
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Old 07-04-2020, 10:24 AM   #15
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How could the house be worth only $50k at death in 2010 and you put $50k into it and it is now magically worth $388k? That makes no sense at all.... especially the $50k value in 2010 unless there a some really unusual extenuating circumstances.
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Old 07-04-2020, 10:29 AM   #16
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I'm also wondering who gets tagged with depreciation recapture when the house is sold. I don't know the answer but maybe someone else here does.
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Old 07-04-2020, 10:29 AM   #17
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How could the house be worth only $50k at death in 2010 and you put $50k into it and it is now magically worth $338k? That makes no sense at all.... especially the $50k value in 2010 unless there a some really unusual extenuating circumstances.
It is only 900 Sq ft. She had $50,000 to spend, got $20,000 done, $30,000 got ripped off and left the state. She and boyfriend completed the remodel out of pocket to repay the estate, so a lot of it was done was materials only.

Could be worth more, but when getting quotes for remodel, basically they said the property was only worth the land. The identical house across the street was $175,000 at the time, but it had been completely remodeled. Mother's house was borderline teardown.
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Old 07-04-2020, 10:32 AM   #18
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So then how could it be worth $388k today?

Even if a fixed up house was worth $175k in 2010 it would have to appreciate 8.3% annually for 10 years in a row to be worth $388k today... it just doesn't seem sensible.
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Old 07-04-2020, 10:35 AM   #19
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With respect, @klucich, all that tax and valuation stuff is details. This is a deal that stinks to high heaven and you need to get out! Let the accountants worry about your basis, taxes, etc. after the dust settles.

For an attorney, I suggest that you look in the attorney directory under "Junkyard Dogs." Once you have retained said attorney, sister should be instructed to talk only to the attorney and never to contact you. This won't be fun.
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Old 07-04-2020, 10:38 AM   #20
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One other thing to consider is that as long as you are a part owner of the property, you may have exposure to liability for tort claims arising from the property (LLCs typically only shield you from contract claims). Imagine what will happen if a guest of your nephew is injured while in the house. I would compel a sale and cash out for that reason alone.
I guess I used the wrong terminology, but she should have known what I was asking:

"Is the estate at risk if you get sued? We really need to move forward with getting the estate legalized. No, estate is closed."

It was my understanding that since 3rd sibling did not sign the LLC papers, there was no LLC, therefore sister opened a checking account in her own name. Said she had record of everything spent and money that goes through that account and could provide details, just ask. I trusted her because she is a CPA. 3rd sibling wants out of this, wants the two of us to split his and is now asking how he can do so legally. Actually I am confused, but apparently since the estate is closed, there is now a LLC? Ugh.
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