Helping in-laws sell long time residence

[Da Nag]

My wife and I have agreed to help her parents sell their long-time residence, and could use some advice.

Her parents are elderly, but we can still communicate effectively with them. We're not so confident they can deal with strangers well; they are at an age where frustration kicks in the minute something gets a little complex, at which point they could easily be confused, or taken advantage of. Fortunately, they realize and accept this, and trust that we'll watch out for their best interests.

They own a home that was purchased back in 1962, and as luck would have it, it's turned into one of the most exclusive areas in Northern CA. They are going to have huge capital gains; their purchase price was $23K for a small farm house, to which they've done relatively little. Still, bare lots that are much less desirable than theirs have sold in the area for over $1M in the last year, and they are surrounded by incredible estates that routinely sell for $3M+. My guess is, they'll get $1.5M easily, possibly more.

Their plan is to move to San Diego, where 3 of their 5 children live - we're the only family that lives close to them currently, and they know we'll be leaving the area in about 4 years. Additionally, San Diego is ideal for them for property tax reasons; they can take advantage of a one-time exemption that allows them to keep their existing and very low tax base when switching primary residences. Since they are on a relatively low fixed income, this is an important detail.

First and foremost, everybody agrees taking care of their current and future needs is the main priority. Switching residences with no out of pocket expenses is the primary goal. However, they have made it clear their estate will be divided between the 5 children, and have made it clear to us they would like to pay no more in taxes than absolutely necessary.

Given the above, are there any strategies we might investigate that will reduce their tax burden when selling?

Thanks much.

[ESRBob]

Gotta Go --
Sounds like there are two tax questions: one is the capital gains on the sale of the property itself, and the second is the estate taxes that would/might be paid when the estate is divided later.

Is it is clear that none of the kids could use/afford/want the house? If someone could use the property and afford to pay some share now or later to the other sibs, then look into the QPRT - Qualified Personal Residence Trust where the parents gift the house to a kid with conditions that lower the value of the gift, but get the house out of the parents' estate. They would use up their lifetime gift exemption, but would not otherwise incur gift tax, and, since there is no transaction, the child would receive the gifted house with the original basis, postponing the day of reckoning another generation re: the capital gains tax.

Of course with estate taxes up in the air, it is a tough time to try to guess which way things will land, or get too fired up about long term estate tax planning.

One thing they might want to consider, though, to reduce the estate tax after they sell the house and have a slug of cash, is to start gifting money to the kids and grandkids, 12k per year, gift-tax-free. They can also pay for grandkids' tuition to college directly -- this could be a big help to the kids, just like money in the bank, assuming it could be done in an equitable way. The cash gifts to grandkids can help set them up with funds for a first house or apartment, money to start a business, or just money to take some sorrt of safe withdrawal from to smooth out the lumps of the early career years. Although it means the money skips you and your sibs, I think money given to the grandkids, your kids and nieces and nephtews, can be a great investment in allowing them the flexibility to get additional education, spend a little more time socializing with better-heeled potential mates, whatever. Not sure everyone would agree, but helping your grandkids marry well may be one of the best investments going...

If your parents are settled on a straight sale in the near future (as opposed to a QPRT) , I don't know of anything clever to do to reduce cap gains, but maybe others do. At 15% after the basis and exclusion, it seems the taxes will be big, but in the grand scheme of things, not a bad price to pay for such a nice gain. (they may run about 150k -- 1.5+ million sale less 500k exclusion less basis less REcommission = about 1 million taxed at 15% (plus Calif state tax - I don't know what it is).

Fairmark.com is a good source for tax info.

btw, I grew up in Orinda (in northern CA) and was visiting there this weekend. Huge runup in prices there, and lots of teardown/upgrades, maybe like your parents' part of northern CA. With Prop 13 having kept so many elderly people in their homes for so long, I can see a huge exodus looming. When that happens, prices might soften, but I am no northern CA real estate expert -- just a thought to consider.

[Da Nag]

Wow, Bob - thanks much for the info! I'll go over it with my wife, and once we've got a good understanding of it, fill in the parents.

Quote:

Originally Posted by ESRBob btw, I grew up in Orinda...

Small world...her parents live in Happy Valley in Lafayette, an area I'm sure you're familiar with.

Thanks for the info on the QPRT - wasn't aware of that. I was aware of the Prop 58 exclusion that applies to parent-child transfers in CA. We live in the next town over (Pleasant Hill), and bought my parents long-time home, and have a tax base that is embarrassingly low thanks to that benefit. As much as we'd love to do another transaction like that with her parents and move into their neighborhood, it's just out of our range - there's no way we could come up with the funds to give them a fair shake.

Thanks again,

Bill

[Da Nag]

Oh, and BTW, Bob - sorry about your book.

[ESRBob]

Gotta Go -- definitely know Happy Valley -- grew up about a mile from there, and spent yesterday at the Lafayette Reservoir (30 year high school reunion picnic)

Thanks for the link to your dog's re-editing of the Work Less Live More book. I'm forwarding it to the publisher for wall art. I'll be recommending the next edition comes with the beef flavor just so your Weimaraner stays interested in ER This could be a whole new market we never considered

[honobob]

Gotta Go* *You can combine the $500K exclusion with a 1031 exchange of the excess but you have to rent the principal residence* for a time (2years?) before the sale.* You didn't say how much the inlaws were buying down so it might not be worth considering because it would be tricky timing with the Prop 90 tax base transfer and they would have to be able to afford both properties during that time.

I think the QPRT would not enable you to transfer the tax base.

One thing to consider with the tax base at the SD property is that if a sibling would want the property down the road is that the low base can be 100% transfered (inherited) unless the property is inherited in equal shares and then the sibling has to take title from 4 siblings creating an 80% reassessment of the property.

Quote:

Originally Posted by ESRBob With Prop 13 having kept so many elderly people in their homes for so long, I can see a huge exodus looming.

ESRBob With Prop 60 & 90 tax base transfers you can take your low taxes with you as early as 53.....unless you're saying 53 is elderly.
Naaaaaaaaaaaaaaaaaaah!

[ESRBob]

Quote:

Originally Posted by honobob ESRBob With Prop 60 & 90 tax base transfers you can take your low taxes with you as early as 53.....unless you're saying 53 is elderly. Naaaaaaaaaaaaaaaaaaah!

Shows you how long I've been out of Calif. These new provisions should negate what I was saying. I just was talking to all these former classmates this weekend whose parents have stayed in the same homes for 50 years, but I guess that is by their choice at this point. The risks of using anecdotal evidence!

[Da Nag]

Quote:

Originally Posted by honobob With Prop 60 & 90 tax base transfers you can take your low taxes with you as early as 53....

Works OK with Prop 60 if you wish to relocate in the same county, but the Prop 90 tax relief is for many, not realistic.

Unfortunately, the participating Prop 90 counties that will take an incoming resident are not the inexpensive and less crowded CA counties where one might like to retire. If one has thoughts of cashing in their suburban equity, and transferring that nice Prop 13 tax base to a big spread in the mountains or the north coast, you can't - none of those counties participate in Prop 90 transfers.

Current participating counties for Prop 90 incoming transfers are Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura. And since your replacement property must be less expensive than your selling property for the tax relief of Prop 90 to apply, one may be forced to move into a home/neighborhood that is less appealing than where they came from. If you want to downsize, it might not be an issue...but if your goal is to simply relocate to a similar quality home/neighborhood, it might be an issue, particularly if you have to pay significant capital gains when selling.

Still...while it could be better, Prop 60/90 tax relief is certainly better than nothing for many folks, my in-laws included. Since they are planning on downsizing a bit when they move to San Diego, they can take a hit in capital gains when they sell, and still maintain their Prop 13 protected sub-$100K tax base when they buy down there.

Quote:

Originally Posted by honobob One thing to consider with the tax base at the SD property is that if a sibling would want the property down the road is that the low base can be 100% transfered (inherited) unless the property is inherited in equal shares and then the sibling has to take title from 4 siblings creating an 80% reassessment of the property.

I assume the 100% transfer is the Prop 58 parent -->child transfer tax relief? That's what we took advantage of when buying my parents house.

Thanks for the heads up on the parent --> child --> sibling reassessment. Wasn't aware of that, and it might come into play down the road.

[honobob]

Quote:

Originally Posted by Gotta Go Works OK with Prop 60 if you wish to relocate in the same county, but the Prop 90 tax relief is for many, not realistic.

I can't believe Modoc County bailed!* My plan Z involved owning the largest spread in Modoc.* Must concentrate on Plans B thru Y.*

Although Prop 13 was sold as a lifesaver for little old ladies on pensions the real benefit was to Big Business and the wealthy.* The supposed intent of 60/90 was to allow seniors (empty nesters) to downsize without increases in taxes but instead of using square footage as the measure they allowed the $ amount to rule which unfortunately eliminated the benefit for alot of people, even those moving within their own county.

Out of the 25 counties that originally allowed the prop 90 transfers I'm surprised it's down to 6.* You would think that a county would welcome a population that is probably at it's highest earnings potential with the least demands on the infastructure.

I am curious since you have family in SD what would they think of waiting to purchase in SD?* Do they believe in the Bubble?* According to alot of people here who claim some expertise in SoCal your inlaws could rent for a while and either pay 30-40% less within two years and pocket the difference or buy up considerably.* I believe up here in NoCAl that the dip will be similar to 89-91 (<10%) and would not be worth the expenses, but if they are already selling and paying cash (increased mortgage rates would not be a factor) for the replacement then it would definitely be worth making an intelligent decision on how soon to buy replacement.*

The best advice I can give is to NOT apply for the benefit until you are sure they will stay in the new place.* If they buy now and hate the place they can sell and buy another place within the two year deadline and transfer the base to that property.* They could even come back to Contra Costa and do a prop 60.* *It is almost impossible to undo a tax base transfer once completed.* So I always advise to keep your options open.* I have expertise in this area!

[2B]

Quote:

Originally Posted by Gotta Go Her parents are elderly, but we can still communicate effectively with them. We're not so confident they can deal with strangers well; they are at an age where frustration kicks in the minute something gets a little complex, at which point they could easily be confused, or taken advantage of. Fortunately, they realize and accept this, and trust that we'll watch out for their best interests.

My concern is they aren't still able to live on their own. If they are now, it won't be long.

This is a good, great time to get control of the finances before there is a serious problem.

Get them to an elder care doctor and talk about where they were.

What you need to look at is if they are compensating for each others inabilities. The problem here is that when one of them falls out of the picture the other one keeps doing their half and thinks the world is wonerful.

That problem has cost my in-laws about $50K. It was very fast and legally next to impossible to resolve in their favor. The pathetic part is they are next to oblivious to it.

[Da Nag]

Quote:

Originally Posted by honobob I am curious since you have family in SD what would they think of waiting to purchase in SD? Do they believe in the Bubble? According to alot of people here who claim some expertise in SoCal your inlaws could rent for a while and either pay 30-40% less within two years and pocket the difference or buy up considerably.

Great suggestion...hadn't thought of that, it makes a lot of sense. The only downside that comes to mind is some possible loss of equity from paying rent for a couple years, but I'm guessing the interest on his selling proceeds might cover most, if not all of that.

And of course, one has to accept prices won't rise in SD during the 1-2 year waiting period...something I'd personally be comfortable with, but they may not be.

Quote:

Originally Posted by honobob The best advice I can give is to NOT apply for the benefit until you are sure they will stay in the new place. If they buy now and hate the place they can sell and buy another place within the two year deadline and transfer the base to that property.

But wouldn't they be paying significantly higher property taxes until they take the benefit? This might be a big chunk of change...currently, they pay under $1,500/year thanks to Prop 13. If they bought something for $1M and didn't take the Prop 90 benefit for the first year, they would be on the hook for roughly 10x that amount, no? That might be an acceptable price to pay for the added flexibility they would receive, but on the surface I think I like your rent idea far better...

Thanks much for the info,

Bill

[honobob]

Quote:

Originally Posted by Gotta Go But wouldn't they be paying significantly higher property taxes until they take the benefit? This might be a big chunk of change...currently, they pay under $1,500/year thanks to Prop 13. If they bought something for $1M and didn't take the Prop 90 benefit for the first year, they would be on the hook for roughly 10x that amount, no?

They may have to pay the higher taxes even if they sell and buy on the same day. It is not automatic. SD will need to get info from Contra Costa and then SD will need to process sale. Sometimes this can take over a year. Of course they'll be refunded back to the date of purchase when approved but they should be prepared to pay at least one year on the purchase price. It will make them appreciate what the neighbors are paying. So the flexibility is really only costing them the interest on $15K for a year or so. I packed my Mom up to move to Hawaii as had always been the plan when the Vegas house got too big.

[honobob]

Even tho I tried to prepare her for Hawaii within 2 years she's back in Vegas after selling/giving/shipping a 3 bedroom house for a condo now she's starting from scratch. A new house/area has got to be a change for someone who's been in the same place for over 40 years.

[ESRBob]

HonoBob-
sad story. I guess it points out the risks of downsizing and moving to another state. Is she able to live close enough to her old neighborhood in Las Vegas to at least stay in touch with her old friends? I've seen some of those new develoment in outskirts of Las Vegas and it isn't where I'd want to spend my final years...

[honobob]

Quote:

Originally Posted by ESRBob HonoBob- * Is she able to live close enough to her old neighborhood in Las Vegas to at least stay in touch with her old friends?*

ESRBob..... I bought the Vegas house in 1994 because she wanted to live near her brother and sister.* At that time Vegas was just starting to grow and local people told me that water would restrict the growth and make existing housing scarce.* Of course since then Nevada has taken water from just about every neighboring state.* When I moved her to Honolulu I had no trouble renting the place and the only reason the one tenant left after two years was because of work across town that was getting harder to get to because of growth.* Even last November when they left I had multiple tenants wanting the place but when The Mom said she really wanted to come back she was able to "come home" except now she is spending every cent on new furniture.

From 1994 to 2005 the house increased from $110K to $300K and even tho I refi'd to a 15 year loan the rent was still positive.* Nevada has done a modified Prop 13 with owner occupied capped at 3% growth and non at 8%.* I think I bought smart in a single story only small development (<150 homes) with only one entrance so no thru traffic and potentially gated if things get rough.* It's located 8 miles to strip just past the older homes.* She wanted only new and most of the old neighborhoods were from 50's and 60's and although nice established neighborhoods they would take a bit to modernize.* The growth beyond is incredible but seemed mostly larger (2500sf on a 4000sf lot) and higher priced.* I think these are the properties that will suffer most in any bubble.*

She's been back over 8 months and seems happy.* Parents,* why couldn't I have been born an orphan?

[ESRBob]

Quote:

Originally Posted by honobob She's been back over 8 months and seems happy.

That's the bottom line. Elusive at the best of times... Seems as soon as we've got our kids out of diapers we've got a few quiet years and then a lot of long distance scrambling. Not complaining, just hadn't quite realized it until recently...