Help....renting a parent's house

[Music Lover]

OR #2
1. Mom relocates from CA to midwest. She moves into retirement community (rental, no purchase).
2. Home is temporarily occupied by family members (over about 6 months) to help maintain it and then sold.

I don't see any advantage to letting a family member live there for 6 months. What if they don't want to move after 6 months? What if something major breaks?

Sell the house after your mom moves and avoid all the potential complications.

 

[calmloki]

What Wolf said bears close attention. Prop 19's affect on rentals can be really expensive in my limited reading.

Regarding relatives living in Mom's house for free or while paying utilities or whatever - think hard on that. I am pretty calm and understanding about rentals and have been renting places out for decades. If you spruce up a place or just leave it and then come back a year later you WILL see changes and damage just from someone living there. If you care about the place you WILL take that damage as a personal affront. I'm talking damage that is just a matter of time and normal use - plants that have died, carpet wear, paint scuffs.

Does Mom care about that house? Does she care about her grandkids? Having them live there sets up some stress points that could outlive your Mom. I've been in a situation where young relatives really needed a place to stay and have had apartments available - I've tucked my head in and kept mum because I like those relatives and want to continue that liking. Many years ago we were working on a place and I let some college friends stay there. After a few weeks I had them move and it changed our relationship totally.

 

[cathy63]

I'm pretty sure Prop 19 is not relevant in this situation since all of OP's proposed options end with "sell the house".

Prop 19 only comes into play if the children decide to keep the house after inheriting it. If it's rented out or kept as a second home/vacation home, the transfer at death will trigger a reassessment and the new property tax will be based on the current market value at that time. However, since they plan to sell the property anyway, the new tax rate would be in effect only as long as it takes to sell the house, and the assessor might not even get around to raising the taxes until after it's sold.

Prop 19 does allow for a $1M exclusion from property tax reassessment, but only if the mother is using the home as her primary residence at the time of the transfer and one of the children then moves into it. It sounds like that's not possible, because by then her primary residence will have been in the midwest for some time.

 

[retire to nature]

If I were your feet, I would sell it now. or after 6month still ok. I have 10 rental properties in MO now and have lived in CA. I know CA rental profit is not so high comparing to here. I am more familiar with LA area, but thru the thread Bay area is not so much high profit either.


for your concern question 1. yes and 2. yes

I am not sure if the property tax would go up. recently, I did probate and did step up basis too. As far as I heard, it is not reported to tax or assessor dept, but I have not gotten this year property tax bill yet. And CA would be different.

I jumped in the rental business yearning for FIRE, and I am learning more and more not so good benefit with all the expenses. Today I even learned depreciation recapture tax which I have to pay more after capital gain. If she really need cash flow so wanna do that, and can't help it. But we know stock is ok to make such a money. 5k for 2mil. Her mind would be just old school or can't let go the home. She could be introduced dividend stock etc.

Also, as rental business owner, I always think about selling time. What if I miss a good time, and have to wait a decade. And extra headache, possibly not enough profit etc. When really needed money like me before, I would take the risk, but now after I have enough money, it becomes very burden.

I am pretty sure CA price is crazy so wanna hold for a while. But I am so afraid of housing crash because thinking about the number of death from COVID19 especially in CA.

Rental house seems nice investment when it started but I would say for young folks for beginning invest fund, not for old folk to manage the property. It has always strained stress of what if.

 

[retire to nature]

I am a proponent of rental properties, but the rental income does not reflect the value of the property.

Who knows...

After learning more rental business, higher rental area doesn't guarantee good tenants either. Maybe I chose wrong people, but higher property tax and the market dont have enough prospective tenants who can pay the high rent.

If ppl has money, they would buy a house. Renter means they don't have good credit score and good background history etc.

case by case, the rent price is higher, but it doesn't match the climbing rate. i have $900 but double property tax house only gets $1300. But later the better house need more expense for remodeling or improvement etc.

 

[wolf]

OP. You mentioned A/B Trust. When your Father passed, was the A/B provision followed ?
Normally, this is what happens. (short version).
Residence gets step up in basis and is put in irrevocable Trust.
Rest of assets are put in, actually left in, original Trust.

You now have 2 trusts. Hence the term A and B trust.

Because Residence/house is in irrevocable trust. The house does NOT get a 2nd
step up in basis. Result. Unexpected Long term capital gain tax. Fed/State.
When you sell.

Prop 19. If plan is to sell, correct, increase in property tax not a concern.
Read in a post, relatives may want to live in house after Mother's passing.
then Prop 19, major issue.

Good luck. Good topic. Lots of valuable info. My comments only apply to California.

 

[gooddog]

Unfortunately I know this part of the tax code all too well.


To put it simply, you do not want to rent it out. It will create complications that the IRS will view as an open door for an audit.



The 'tax guy' you are going to see. I would spend the $ and get a tax attorney that specializes in real estate - not taxes in general.

 

[samcat]

Also ask your tax guy what federal tax rate will apply to the rental income since the house is owned by a trust. Trusts have vastly different tax brackets than individuals. Just pulled the below 2020 trust federal tax rates from a site online:

$0 to $2,600 in income: 10% of taxable income
$2,601 to $9,450 in income: $260 plus 24% of the amount over $2,600
$9,450 to $12,950 in income: $1,904 plus 35% of the amount over $9,450
Over $12,950 in income: $3,129 plus 37% of the amount over $12,950

It appears that much of her rental income will be taxed at the 37% federal tax rate not to mention applicable state income tax rates.

This is a living trust using her SSN, not a trust that has a separate EIN. The living trust is disregarded for tax purposes and does not file a separate tax return. The tax rates are the individual tax rates.

 

[samcat]

I haven't read all the responses yet but here is my two cents since I live in CA. I am not familiar with the new Prop 19 so you should check that out.

When your dad died, the house was worth $1.5M. She only gets the step up in basis on his half. So, the basis in the house would be $762,500. Half of $1.5M plus half of his $25k. She gets her $250k exemption. So, the basis if she were to sell is $1,012,500.

If she rents it, she has to have lived in it for 2 of the past 5 years in order to be able to take the $250k exemption. Otherwise she loses it but she still has the basis. I'm not sure how rental accounting and depreciation work and that might affect the basis.

If she stays in the house and dies there, the heirs get the stepped up basis of $2M. I'm not sure what happens if it is a long term rental (meaning more than 2 of the last five years with her living in it). The heirs would only have to pay taxes on any net proceeds above $2M.

 

[samcat]

ETA: If OP is saying they would rent it out for 5K per month, that is extremely under priced for a 2M home.

We have a 1500 square foot house (3 bedroom/2bath) in the SF Bay Area that is probably worth almost $2M. $5k per month rent is probably accurate. $2M doesn't buy much here anymore...it is super sad.

 

[Music Lover]

We have a 1500 square foot house (3 bedroom/2bath) in the SF Bay Area that is probably worth almost $2M. $5k per month rent is probably accurate. $2M doesn't buy much here anymore...it is super sad.

There are plenty of other nice places to live. SF doesn't have anything special that plenty of other places don't have other than over priced housing, rampant homelessness, and a poop problem so bad that they publish maps about it.

 

[samcat]

There are plenty of other nice places to live. SF doesn't have anything special that plenty of other places don't have other than over priced housing, rampant homelessness, and a poop problem so bad that they publish maps about it.

My comment was re the other comment that $5k a month rent was underpriced for a $2M house. Nope. A $2M house in the bay area is nothing special.

It wasn't about that that someone should live in SF (though I do not live in SF - just the SF Bay Area).

 

[cathy63]

I haven't read all the responses yet but here is my two cents since I live in CA. I am not familiar with the new Prop 19 so you should check that out.

When your dad died, the house was worth $1.5M. She only gets the step up in basis on his half...

Since the house is in California, which is a community property state, the Mom got a step-up in basis on the entire house when the Dad died.

 

[gooddog]

The varied responses to the OP question validate seeing a tax attorney that specializes in these matters.

 

[samcat]

Since the house is in California, which is a community property state, the Mom got a step-up in basis on the entire house when the Dad died.

You are right! I learned something today. The three estates we did were for single people (divorced parents and mom's gentleman friend).

The title to the house has to be correct though. If it is joint tenants, then it is only half the basis. That's why it is important to see an attorney who knows about the state.

 

[TrvlBug]

... ...

The title to the house has to be correct though. If it is joint tenants, then it is only half the basis. That's why it is important to see an attorney who knows about the state.

I was wondering if this was still the case. I really need to check to see how we hold title to avoid this problem. We've owned our home for so long we'd take a huge tax hit with only half step up basis. I understand it's an easy fix, however, who wants to deal with going to court when you're grieving.

 

[pdxgal]

My sister and I were in a similar situation with our mom a few years ago. Someone heard about my mom moving and asked to rent it from us. At the time we had so much going on with my mom that renting it out seemed easier (we also knew the renters, which helped allay some concerns). Ended up renting it for 6 years, 5 after my mom passed. Financially it worked out well. My mom got the income while she was alive. When she died my sister and I inherited at the stepped up basis. The last tenants offered to buy it from us in December, so we just sold it.

One consideration IMO is how much longer you think your mom will live. If many years, then it could be worth it to just have the tax bite now vs the hassle and potential risk of renting it out. If only a few years, could be financially beneficial to wait and inherit stepped up basis (if that's an option).

Re: carrying costs noted by Sunset.... usually for SFH the renters pay water and utilities, so carrying costs would be repairs/maintenance/taxes. You can always get a property mgmt company to help manage, for an added fee.

 

[SonofCohoes]

Can you imagine renting and folks losing their jobs due to Covid? No money coming in and folks living in the house? Today with things as they are renting that property is a ridiculous risk.

 

[ncbill]

I haven't read all the responses yet but here is my two cents since I live in CA. I am not familiar with the new Prop 19 so you should check that out.

When your dad died, the house was worth $1.5M. She only gets the step up in basis on his half. So, the basis in the house would be $762,500. Half of $1.5M plus half of his $25k. She gets her $250k exemption. So, the basis if she were to sell is $1,012,500.

If she rents it, she has to have lived in it for 2 of the past 5 years in order to be able to take the $250k exemption. Otherwise she loses it but she still has the basis. I'm not sure how rental accounting and depreciation work and that might affect the basis.

If she stays in the house and dies there, the heirs get the stepped up basis of $2M. I'm not sure what happens if it is a long term rental (meaning more than 2 of the last five years with her living in it). The heirs would only have to pay taxes on any net proceeds above $2M.

IIRC, in community property states like California the surviving spouse gets a 100% step up in basis.

https://estate-elderlaw.com/step-up-in-basiscapital-gain-tax/

"What if my spouse and I own property together in a community property state?

Community property receives a 100 percent step-up in basis on the death of either spouse. It does not matter which spouse dies first; all of the community property will receive a new basis equal to its fair market value as valued for estate tax purposes."

 

[RAE]

Besides the money aspect, who is going to manage the rental ?
Renting at this time, when someone can move in and stop paying rent and not be evicted is a risk.

+1000. Personally, I would not even consider renting the house and being a landlord at this time, because of the moratorium on evictions. Just too much of a risk. Also, renting a home without having a capable person nearby to manage the rental is not something I would consider, either. Lots of things can happen to a rental house, so someone needs to be nearby to check on the place and attend to any needed maintenance, repairs, etc..