Real estate & tax implications - elderly parent
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Anonymous
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Question for the DCUM brain trust: elderly mother in law owns a 1960s-ish split level house in a Bethesda neighborhood off River Road. Corner lot, zoned for Whitman (I think). Renovated kitchen about 10 years ago and refinished hardwood floors maybe 4 years ago. She will no longer be able to live independently so now we’re trying to decide what to do with the house. She is in her late 80s but in relatively good health so not expected to depart this world in the extreme near term. With all this said: anyone have advice on what we do with the house for now? She does not NEED to sell right now, so it’s a question of rent versus sell.
We’ve had one person tell us to rent it out, and then sell after she dies (whether that’s in one year or ten years) as it would be more advantageous from a tax perspective. It’s also been suggested she give the house to her son as a gift, and son can then dispose of it as he sees fit. And, there is of course what feels like the most obvious option: sell the house now and let mother in law dispose of the cash however she’d like (it would go to her son in any event). Anyone have opinions? No local family to manage a rental, and no idea how much it would rent for, but presumably we could find a management company. House is 3BR, definitely livable and in decent shape but bathrooms are dated, nice yard. Advice appreciated. This is one of many, many issues we are now trying to manage for mother in law after recent turn of events with her health. Before this, she was planning to stay put until she turned 100 and then consider assisted living. 
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Anonymous
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If she gives it to her son now, his cost basis is the price she initially paid for it. If it’s inherited, the son gets the stepped up cost basis, the value of the home at the time of her death.
In your shoes, I’d probably have her sell it so she has the money to do with as she wishes. Renting would give her a stream of income, but it’s also a burden that it sounds like no one is interested in dealing with. |
Anonymous
| Sell— she gets the tax exclusion and the cash and none of the headaches of renting it. |
Anonymous
This. Whatever has been spent on improvements increases her cost basis and reduces tax. It's a lot of work being a landlord, even if you have someone to manage the property. |
Anonymous
| OP here. What about just leaving the house unoccupied for a while? How long is too long to leave unoccupied if ensuring it’s checked on and otherwise maintained? |
Anonymous
How long will it take for her to make her peace with selling? How long to clean it out? |
Anonymous
She is no longer the decision maker on this, as she has dementia and still thinks she’s in good shape to move home and live independently (she is not). Clean out: as fast as her son is willing to do it. Realistically, three to six months. |
Anonymous
I think you could leave it empty for 6 months with being checked on and people coming and going for clean out. I’m sorry for her rapid decline. |
Anonymous
| Democrats have formally proposed eliminating the step up basis for inheritance. (It's an unfair tax loophole and should be eliminated, imo.) It probably won't disappear in the next 2 years but I bet it will disappear in the next 5, 10 years at most. |
Anonymous
You need to tell the insurance company at some point if it’s unoccupied and they will increase the insurance rate. |
Anonymous
This has actually traditionally been a Republican proposal because it was always buried in the fine print of estate tax repeal (that is, estate tax repeal was a tax break for the superrich but a tax increase for 99.9% of Americans) but I actually don’t think it will go anywhere because it’s a huge paperwork nightmare to figure out the basis of inherited property. I do think the estate tax exemption may go lower. |
Anonymous
| Do not give it to the son now!!!!!! This would be a massive mistake. Assuming she’s lived there a while, she should have $250k in gains that can be taken tax free. Who knows if Biden will keep that loophole. I would sell the house now. Prices are at an all time high with people fleeing cities and rates so low. |
Anonymous
| Sell |
Anonymous
| Sell - she may need the money for her care. If she gifts it to her son and she runs out of money and needs to go on Medicaid, there is a look back period. If she has plenty of money for her care and this isn’t an issue, then son will just end up inheriting the remaining cash. She should not gift him the house now bc of the tax issues the pp’s explained earlier. |
Anonymous
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I would rent and then sell after her death. You'll lose the stepped up basis but still probably net a higher amount after taxes. The rental can be handled very easily by a real estate agency.
OP, you need to make quite a few calls. First call a few real estate agencies and talk to some experienced agents. Have them tour the house if possible. Get their thoughts on the rental market and get a cost on property management. Also get their thoughts on a sale price right now versus a sale price in a year or two (which would still keep her within the stepped up basis if she moves out, say, tomorrow.) Second talk to a bunch of nursing and retirement homes to get a good feel for what she will be paying. Some places are like a rental, with only a hefty fee each month, some you buy into plus pay a monthly fee. It depends on the type of facility and the services. Third talk to companies that provide in-home care. It can be a lot more affordable than you think although it will mean a lot more oversight, which you may or may not be able to provide depending on your own life and your location relatives to the parent. Fourth talk to a tax attorney who also knows estates. There are other factors to consider of course but these cover the basics. We're going through the same things ourselves. |