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Unread 2015-11-19, 03:58 PM   #1
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Default Coming into "life changing" property.

This may be a little long winded. So I apologize in advance.

This past weekend my grandparents and I had a conversation that figured would happen eventually. My grandparents (early 70's and late 60's) want me to have their farm when they pass. Some quick numbers...

Property - 360 acres
House - 8 bed 6 bath...around 5000 square feet + a 2500 square foot basement...its big. Built in 2000, so 15 years old right now.
Estimated home value - $700,000 (could be low).
Estimated land value at $1,500 an acre, $540,000.
Total - $1.24 Million

My grandpa built this house and has owned the property since 1973. When the economy tanked in 2008 he borrowed against it and currently owes ~$220,000.

My ultimate plan would be to live down there, and eventually move my inlaws (who are worth over seven figures I would guess) down there with us. Timeline would be about 10 years to moving.

Now, my wife and I own a house here in KC. We owe 68k on it. We will be debt free this summer and have ~20k in mutual funds/ 401k's. We're 25 and 26 years old.

I have a high ceiling in my field. Should be close to 100k salary in 5 years. Current gross annual between the two of us right now is $74k. The next 5 years should look something like 77, 80, 86, 95, 128k. I'm not factoring in her raises/ job changes. Only mine.

How would you guys prepare? Should I offer to buy the house for what they owe then just have them pay me rent? Should I just stack cash as high as I can for 5 years then make a big "down payment"? Should we pay off our house as quick as we can and then sell it/ use it as a rental? What can I put money in something that will gain me decent growth but still allow access to purchase a home without penalty?

Feel free to ask questions. I'm sure there are a LOT of variables I'm not thinking of. I'm a little overwhelmed just thinking about what I should try and do.
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Unread 2015-11-19, 04:49 PM   #2
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Do they want you to inherit it when they pass, or do they want you to buy it? Im sure there would be huge tax implications because of the difference in value vs sale price if you purchased for a fraction of its mkt value.

This should be discussed between them and you with an estate planner, lawyer, and or CPA. There are waaay too many variables here.

Once they decide the best course of action for their property, then you can decide how to prepare.

If you inherit it you can probably take out a mortgage to pay the taxes (if there are any) and whats owed on the old mortgage. Setting up a trust would be another option that may have some tax benefits.
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Unread 2015-11-19, 04:58 PM   #3
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I think the ball is really in my court on what happens whether it's now or later. I don't think they would have a problem with me purchasing it from them, they may actually prefer it. They just said that they want me to have it and don't want to sell it to anyone else. They've been on the fence about selling it since they're both getting older and still work a lot.
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Unread 2015-11-19, 05:37 PM   #4
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Do they need proceeds from a sale to live on in full retirement?
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Unread 2015-11-19, 06:08 PM   #5
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Originally Posted by evilpoptart View Post
...
Now, my wife and I own a house here in KC. We owe 68k on it. We will be debt free this summer and have ~20k in mutual funds/ 401k's. We're 25 and 26 years old.

I have a high ceiling in my field. Should be close to 100k salary in 5 years. Current gross annual between the two of us right now is $74k...
....
Sorry, this caught my attention, but how in the f? Debt free as in nothing but the house payment?

If not, I must really be failing at life.



That sounds like a hell of a property, and agree that this needs to be discussed further in depth with them, and with some professionals.
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Unread 2015-11-19, 06:22 PM   #6
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I think you are thinking waaaaaaaaaaaaaaaaaaaaaaaaaaaay in advance. You may still have another 15-25 years of waiting.
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Unread 2015-11-19, 07:13 PM   #7
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When everyone is gone and it's just your family.....
Mathematically speaking, holding and maintaining a property like that will be substantial.
you will need about triple your current income just to maintain and pay taxes on it. (20k taxes + another 20k in maintenance on average)

What is your plan if your income drops?
High end property does not move fast so you might have to sit on it for a while in order to sell it.
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Unread 2015-11-19, 07:58 PM   #8
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Do they need proceeds from a sale to live on in full retirement?

I don't think they have hardly anything in retirement. My grandpa has always worked for himself. Grandma has worked at a medical clinic but I'm not sure she's put much in.

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Sorry, this caught my attention, but how in the f? Debt free as in nothing but the house payment?



If not, I must really be failing at life.







That sounds like a hell of a property, and agree that this needs to be discussed further in depth with them, and with some professionals.

Should have been more clear on that. Yes, minus the house. We have a little credit card debt to clean up.

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I think you are thinking waaaaaaaaaaaaaaaaaaaaaaaaaaaay in advance. You may still have another 15-25 years of waiting.

They could very well live that long. But I don't think they want to maintain that home when they are that old.

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When everyone is gone and it's just your family.....
Mathematically speaking, holding and maintaining a property like that will be substantial.
you will need about triple your current income just to maintain and pay taxes on it. (20k taxes + another 20k in maintenance on average)

What is your plan if your income drops?
High end property does not move fast so you might have to sit on it for a while in order to sell it.

Not sure what you mean by the first part?

I don't plan on selling it. Do you really think I'll need to be pulling in over 200k to keep up with it? I haven't even looked at tax implications. It's very rural Missouri, so I'm pretty sure their property taxes aren't that much. I could be wrong.

20k a year for maintenance seems pretty high as well. But I've never owned a house that big so I don't know.
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Unread 2015-11-19, 09:17 PM   #9
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At the age the house will be when you're purchasing it in 10 years time, at 25 years old, you're looking at Roof, Windows, HVAC, water heater, plumbing, concrete, siding/trim, etc. A 25 year old home is about the worst age for a home to buy because it's right in between the age where owners neglect just about everything since it was a new home, and having had everything replaced by the next owners that then had to fix everything (IE: you)

What's said is true. Net worth, it's probably a bad ass deal, but you're going to cost you more than it's going to give you until you finally decide to get rid of the place.
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Unread 2015-11-19, 11:12 PM   #10
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Well.. sounds like making them a 200k offer on a 1.2m property wont leave them much for retirement. Especially when you pay gift taxes on the 1m difference. Then you have to consider Medicaid Reclamation if they need medicaid for long term care in retirement because they dont have any money saved.

Im with tailwag. You are waaay ahead of the game here. Get them to a good estate planner and start looking at options but if they dont have any other source of retirement funds, sounds like the farm proceeds are what theyll need to live on once they can no longer work. Those needs will be much more than the 220k you're thinking of offering them and then charging them rent.

Fyi - You can find the tax costs on the county website.
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Unread 2015-11-20, 10:59 AM   #11
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Well.. sounds like making them a 200k offer on a 1.2m property wont leave them much for retirement. Especially when you pay gift taxes on the 1m difference. Then you have to consider Medicaid Reclamation if they need medicaid for long term care in retirement because they dont have any money saved.

Im with tailwag. You are waaay ahead of the game here. Get them to a good estate planner and start looking at options but if they dont have any other source of retirement funds, sounds like the farm proceeds are what theyll need to live on once they can no longer work. Those needs will be much more than the 220k you're thinking of offering them and then charging them rent.

Fyi - You can find the tax costs on the county website.

At this point they just don't want to have a mortgage. When they are too old to work I believe they will be taken care of by my parents. I'm by no means trying to rip off my grandparents. Will definitely have additional conversations on what everyone is expecting.
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Unread 2015-11-20, 11:59 AM   #12
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could always look at an assumption on their mortgage.
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Unread 2015-11-20, 01:14 PM   #13
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Well.. sounds like making them a 200k offer on a 1.2m property wont leave them much for retirement. Especially when you pay gift taxes on the 1m difference. Then you have to consider Medicaid Reclamation if they need medicaid for long term care in retirement because they dont have any money saved.
Partially correct.

If you purchase the home for 200k, the additional 1 million would be deemed a gift. The grandparents would file a gift tax return, elect gift splitting and it would use up a portion of their Unified Credit. They have enough credit to cover 5.43 million each, for a total of 10.86 million in gifts and estate.

Short answer is there would be no gift tax unless they have given away a lot of other property/cash over the years.
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Unread 2015-11-20, 02:31 PM   #14
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Partially correct.

If you purchase the home for 200k, the additional 1 million would be deemed a gift. The grandparents would file a gift tax return, elect gift splitting and it would use up a portion of their Unified Credit. They have enough credit to cover 5.43 million each, for a total of 10.86 million in gifts and estate.

Short answer is there would be no gift tax unless they have given away a lot of other property/cash over the years.
Wouldn't it be better to inherit the property when they die? His NEW cost basis will be the market value at that time. He could sell it and not owe any capital gains taxes.
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Unread 2015-11-20, 03:53 PM   #15
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Wouldn't it be better to inherit the property when they die? His NEW cost basis will be the market value at that time. He could sell it and not owe any capital gains taxes.
Absolutely, he gets a step up in basis to the current market value, and automatically gets long term treatment even if he only owns it for a day.

But from the facts given above it doesn't look like that would work, the only shot he would have is to gift them up to 56,000 a year (current max) to live on and hope they never need to go into a medicare long term care facility, as they will basically "seize" the property to pay for the care.

At late 60s and early 70s long term care insurance would be insanely expensive.

If he is planning on keeping the house forever and passing it down in the family then the step up in basis might not be a big deal breaker, as they could pass it down at the op's death and get the step up there, but would certainly be nice to have now as things change and he may need to sell it at some point.
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Unread 2015-11-21, 12:37 AM   #16
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When everyone is gone and it's just your family.....
Mathematically speaking, holding and maintaining a property like that will be substantial.
you will need about triple your current income just to maintain and pay taxes on it. (20k taxes + another 20k in maintenance on average)

What is your plan if your income drops?
High end property does not move fast so you might have to sit on it for a while in order to sell it.
Taxes on land, are a lot different than taxes on a home.
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Unread 2015-11-25, 05:55 PM   #17
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We're planning on meeting with an estate planner next year to try and figure out some details.

Chatting with a couple of guys at work, they suggested to get a couple head of cattle which would allow me to change the farm to "agriculture" land and be a huge tax break. Gonna look into that.
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Unread 2015-11-29, 06:29 PM   #18
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We're planning on meeting with an estate planner next year to try and figure out some details.

Chatting with a couple of guys at work, they suggested to get a couple head of cattle which would allow me to change the farm to "agriculture" land and be a huge tax break. Gonna look into that.
We have ag exemptions here in TX and they are huge. One thing a guy I was talking to about land down here recommended was to go to the local chamber of commerce. Their goal is to help develop their communities, so he said they are always willing to help folks with land planning as well.

He mentioned also that he worked with a Forester to come in a cut some trees down to be sold and that he made about 15k over a couple years and it improved the quality of his property as well. Just something else to think about if you have timber on the property.
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Unread 2015-11-30, 10:15 AM   #19
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It's very timber heavy. He had some of it logged a few years ago. They did a really shitty job. There are tree tops all over the place. It's gonna take a while to get it all out of there. But that's definitely something that we have talked about. The property is probably 90% timber, 5% fields, 5% roads.
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Unread 2015-11-30, 10:53 AM   #20
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There are tree tops all over the place. It's gonna take a while to get it all out of there.
We had the same issue with tree tops when we had our place logged. We ended up just cutting them into firewood. By now they should be dry enough to burn and they are generally small enough you don't have to split them.
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Unread 2015-11-30, 02:58 PM   #21
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We had the same issue with tree tops when we had our place logged. We ended up just cutting them into firewood. By now they should be dry enough to burn and they are generally small enough you don't have to split them.

That's what we're doing. Splitting it and my uncle sells it. We probably have 20-25k in firewood from treetops just sitting there. I'll probably be there every weekend this spring summer to get it all ready.
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