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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Avoid Tax Problem with House Date: 12/7/2013 11:03 AM
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My girlfriend and I are planning an addition to my house. Since she currently lives 1000 miles away she gave me $5500 to apply to the architect's bills this year. That's well under $14K so no gift tax problem.

I own my house free and clear. At some point title to the enlarged house will be put in both names, though we don't plan to marry for a number of reasons. We're in our late 60's, BTW.

I will contribute the existing house and she will contribute the addition and some remodeling to the existing house. Ideally when the remodeling phase arrives I'll kick in enough so we both have roughly equal financial stakes in the finished house.

My concern is how we deal with paying the construction bills so neither of us incurs any kind of tax burden. I'm thinking if she gives me money to pay construction bills that will be viewed as a gift and subject to gift tax. Am I being paranoid or should I insist she write all the construction checks? Just trying to avoid a problem before it arrives.
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119655 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 11:10 AM
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Just trying to avoid a problem before it arrives.

Easy peasey, and were I she it would be the only way you'd get a penny. Add her to the title now, not after the work is done. Voila! No gift tax problem for her, and it lessens your gift tax problem when you add her to the title.

Not that you asked (that's never stopped me before), but if either or both of you have expectant heirs you need a pre-nup. You wouldn't believe some of the things I've seen when second marriages end.

Phil
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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119656 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 11:24 AM
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Not that you asked (that's never stopped me before), but if either or both of you have expectant heirs you need a pre-nup. You wouldn't believe some of the things I've seen when second marriages end.

I would, and inheritance issues don't start with a second marriage.

One family is fighting over an inheritance because it was left to the child who had primary care responsibility for their mother. Only problem, the mother created serious tax problems. The IRS was the only heir.

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119657 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 1:11 PM
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Not that you asked (that's never stopped me before), but if either or both of you have expectant heirs you need a pre-nup. You wouldn't believe some of the things I've seen when second marriages end.

They are not getting married, which I believe presents it's own set of tax issues when one dies, assuming the other inherits the house.

IP

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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119658 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 1:57 PM
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Add her to the title now...

Wouldn't adding an unrelated person to the title of one's house constitute a gift of half the house's value?

And subsequently, wouldn't paying for major construction on a house constitute a gift of half the construction's value, to the co-owner?

Of course, a substantial gift only means one has to add Form 709 to one's tax return. It doesn't mean any add'l tax is actually owed. For most people, the tax consequences are zilch.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119659 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 3:41 PM
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They are not getting married, which I believe presents it's own set of tax issues when one dies, assuming the other inherits the house.

I don't know what happened in between my starting to write my shopworn "'marriage is just a piece of paper' goes out the window when you see the pieces of paper an unmarried couple needs to get the same legal protections." Thanks for snapping me to.

There's really no problem with inheriting from a non-relative, assuming there are no estate tax issues. But there are legal protections that come automatically to married couples that must be dealt with in legal documents by unmarried couples. Otherwise all hell can break loose, including the dead person's family coming through and ransacking the house.

Phil
Rule Your Retirement Home Fool

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119660 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 3:44 PM
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Wouldn't adding an unrelated person to the title of one's house constitute a gift of half the house's value?

And subsequently, wouldn't paying for major construction on a house constitute a gift of half the construction's value, to the co-owner?


Yes. That's why I suggested that getting the big gift out of the way before increasing the value of the property would lessen the issue. People have been known to use trusts and other machinations to get around gift tax limits, but in this particular case I come back to the fact that not one penny of mine would go into the property until I was on the title.

Phil
Rule Your Retirement Home Fool

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119661 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 6:14 PM
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Thanks, Phil. I knew we needed an attorney before proceeding to construction but it sounds even worse than I feared.

Thinking on the fly, suppose I sell her half the house, which in the current market would give me a relatively small gain, way under the tax exclusion for profits on a sale. Then she's on the title as half owner and I use what she paid me to pay for half the addition and she pays the other half?

Works in my logical mind but we're talking about the IRS here. (No offense to former employees intended.)

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119662 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/7/2013 8:01 PM
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Thinking on the fly, suppose I sell her half the house, which in the current market would give me a relatively small gain, way under the tax exclusion for profits on a sale. Then she's on the title as half owner and I use what she paid me to pay for half the addition and she pays the other half?

I want to thank you for a question without quotation marks. As in, "suppose I 'sell' her...." If she has the cash and inclination to do so it sounds on the surface OK to me. I would probably suggest that you get a professional appraisal so that it's well documented that she's paying FMV. As I recall there's no problem with using the exclusion with respect to only a partial sale, but you'd want that confirmed as well.

Pros?

Phil
Rule Your Retirement Home Fool

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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119665 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/8/2013 12:28 PM
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This is not the board to get personal, so apologies in advance, but:

suppose I sell her half the house... is good, but what would be even better, IMHO, is if you both sell your respective houses and go find a 3rd house to buy together. That would be very clean tax-wise, but the real reason I recommend it is because I know a lot of couples where one moved into the other's house, and the newcomer never really felt at home.

So whereas Phil, in your gf's shoes, wouldn't spend a penny without being on the title first; I, in your gf's shoes, wouldn't move into your house at all.

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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119666 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/8/2013 12:36 PM
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Btw, if you sell, the $5500 you've already spent on architect's fees? Sunk cost.
I recently fired an architect after spending $10k on design; and it cost me another $10k to break the contract. Boy I'd like that $20k back, but going forward with a new architect who has a better design is better than bemoaning the past. You can put your architect on hold while you and gf at least consult with a Realtor and look at what other houses are available.

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119667 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/8/2013 1:32 PM
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YewGuise,
We've been looking for over a year and a half. Finally decided since we like this location and the bones of this house so why not stay here and build the extra space we need. Only downside is in this market it costs more to build footage than to buy it. Although even the houses we thought might possibily work needed major remodels so the total cost could be about the same. Still checking available properties regularly. If the right one comes along before we start construction we'll grab it and eat the architect's fee. $5,500, BTW, is a total cost unless we want his services as a consultant during construction, which we don't. So far we've only spent $3,000 and could halt the design and walk away any time.

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119668 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/8/2013 1:50 PM
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If the right one comes along before we start construction we'll grab it and eat the architect's fee. $5,500, BTW, is a total cost unless we want his services as a consultant during construction, which we don't.

I have a friend who is an architect. He points out that while it is fun to design things, most of his work comes after the design is completed and paid for. This work (that the client need not accept and pay for) is the supervision of the construction, since the builders and contractors routinely modify the plans to cut their costs and increase their profits. Sometimes, such as in that building with flying passageways, this can have fatal results.

https://en.wikipedia.org/wiki/Hyatt_Regency_walkway_collapse...

So unless you are prepared to spend a lot of time at the construction site, or if you are doing all the work yourself, you might find that keeping the architect on during the construction is a very good investment indeed.

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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119669 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/8/2013 2:48 PM
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OK, totally OT for taxes:

Basic home renovation options are:

1. Design-Build. Design and construction by same company.

2. Design by architect, then construction by independent G.C. after competitive bid process.
Even the most upstanding contractors run the project to their own benefit as much as possible. It's well worth it for the owner to have an architect on his side during construction, to review requisitions for payment (e.g., contractor says "I'm 80% done framing, so you owe 80% of the framing cost," but to you it looks like he's 50% done, so you can let your architect determine what percentage is right), to review materials substitutions (e.g., contractor says "These doors are stain-grade," but to you they look paint-grade, so let the architect tell him he can't use them), etc.
A contractor likes to keep the homeowner happy to a point, but he really defers to the architect, because the architect is (1) in the field and knows what he's talking about, and (2) a source of future business.

In fact, my daughter's an architect (3000 miles away) and offered to design my home renovation, but even though she's terrific I said no thanks, because I wanted someone local who knows the local contractors and can both guide in their selection and help supervise during construction (not that the he would be there every day, but he'd be available via phone/email, and would visit as needed).

I thought I'd have the best of both worlds by hiring a Design-Build firm owned by an architect, but it turned out his designs were uninspired. He'd done some terrific work for others, so I figured the fault lay with my house and budget, but when he gave me the construction price it was so over budget we parted ways (and I got the ridiculous haircut and swore off Design-Build). My new architect came up with a terrific design, and we're in the bidding process now. I've paid him $18k so far, and for another $5k will keep him on board through construction.

Not sure whether the price differences (between your architect and mine) are due to scope of work or regional differences, but the concept of having an owner's rep during construction is the same.

Best of luck with your house hunt, renovation, taxes, and new life together!

YG

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119696 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/11/2013 2:46 PM
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My girlfriend and I are planning an addition to my house.

Just food for thought. Are their "common law" marriage laws in your state?

...though we don't plan to marry for a number of reasons …

You might already be.

...she currently lives 1000 miles away …

This may or may not answer the above question.

JLC

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Author: YewGuise Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119697 of 121061
Subject: Re: Avoid Tax Problem with House Date: 12/12/2013 5:06 PM
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JLC,

I recall looking into this when my son and his GF moved in together, and found that for those few states that still recognize common law marriage, requirements include that the couple be living together as husband and wife, and also claiming to be husband and wife, for many years.

Not an issue for OP.

YG

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