Gotta know your kid...
windsurf said:
I am going to take @ 150k (@10% of net worth not including our home) which is now in a taxable account and spend it on a condo for my grown-up but single working child. She works hard for a not for profit and we want to do this to free her from rent and, hopefully, to further diversify our holdings and to stop my penchant for playing with stocks in this taxable account. We would probably be selling in three or four years. The condo will be in NE Ohio and real estate values here are relatively stable (read that stagnant if you wish). Good idea/bad idea??
I'm ambivalent. I can only imagine Martha's opinion!
Here's some things to consider:
1. How's your spouse feel about this? If there's anything less than complete agreement then it'd be all too possible to have to deal with smoldering resentment, especially if that spouse isn't the child's mother.
2. Do you have any other kids who might be expecting parity? Sibling rivalry, even if they're as close as the Olsen twins, could make it difficult to get them to appreciate the "works hard for a non-profit" part.
3. "The Millionaire Next Door" has many bad things to say about Economic Outpatient Care and its damaging effects on motivation & initiative. "Teach a child to buy a house" is a skill, "buy a child a house" is a subsidy.
4. You might have to pay taxes when you liquidate the investment to withdraw $150K. So this could be more expensive than originally expected, and you might have to pay estimated taxes if there's not sufficient withholding.
5. Unless this purchase is done as an investment, with a signed rental agreement and Schedule E filed on the rent receipts, the IRS might decide that this $150K is a gift. This would affect your gift tax exclusion and might require paperwork to be filed. This isn't necessarily a problem but it'll play havoc with probate if you die without filing the form.
6. Closing costs are generally not earned back from rising home equity for five years or more. If you sell after 3-4 years then you'll almost certainly lose money, especially if you pay a realtor's commission at either the purchase or the sale. And it's hard to imagine a RE runup in that part of the country, especially after reading this article on
shaming absentee owners.
7. Is this hard-working kid going to be expected to handle maintenance & repairs, or is that an additional cost to you or to her?
8. What happens when the hard-working child loses the job? Gets a live-in roommate or gets married? Has a kid and decides to be the stay-at-home parent? Gets sued? Files bankruptcy? I'm not claiming that any of those things are going to happen, but living rent-free in assets owned by others can imply that some legal or tax maneuvering is at hand. Life changes could get messy.
Other considerations:
1. You could charge rent (and file Schedule E) and then return it under the table as a cash gift to the child. I'm sure the IRS has many bad things to say about this but it appears unenforceable (unless you brag about it on this board and get turned in for the 10% recovery reward).
2. You could deed the property to the child over several years in increments (under the $11K annual gift limit) of about $22K (gifting from both you and your spouse). In 8-10 years the child would be a homeowner and you'll still have your full inheritance-tax exclusion.