best way to use 200k gift?

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genjix
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best way to use 200k gift?

Post by genjix »

My parents are selling the house and they will be giving me a 200k gift from the proceeds. What is the most efficient way to use it?

Im 33
Live in NY
make 41k/year (25% federal)
Have 42k in IRA
Single
50k in savings
Plan to get a coop this year.
No current Debt

I was thinking I should I buy the coop out right, then contribute the max $16,500 towards my 403b annually (putting me in the 15% tax bracket) and if I have extra money roth IRA Expenses would be $800 maintenance fees monthly, electric, cell phone and food after that.

Or would putting a downpayment of 100k and using the other 100k towards income investment make more sense?
Manbaerpig
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Post by Manbaerpig »

I'd shoot for a ~20% downpayment or thereabouts, no need to go higher than that generally. interest rates are still near generational lows
califboglehd
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Post by califboglehd »

+1
The return on a good mix of stocks and bonds should easily outperform a 4.5% mortgage that is tax deductible.
At the end of the day... it's the end of the day.
Topic Author
genjix
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Post by genjix »

i would have to put at least 100k down payment because the board requires a 38% debt to income ratio, and in order to get that would be 100k down.
Dandy
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Post by Dandy »

Your parents might be subject to a gift tax if they give it to you all at once.

I would certainly use some of it for a downpayment on the coop. Enough to make the monthly mortgage payments affordable. I wouldn't put all of it in the coop. I like to have money on hand, so I would save/ invest a good portion to give you flexibility. As you build the savings/investments you can start or increase your pre payment of your mortgage.

"found money" and your money are the same monies. So if you had saved $200,000 would you put it all into the coop? If yes, then it fits your spending/saving approach vs mine.
Manbaerpig
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Post by Manbaerpig »

I'd look for a different property that only needed a 20% downpayment
rustymutt
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Post by rustymutt »

Don't use it, save it.
Even educators need education. And some can be hard headed to the point of needing time out.
natureexplorer
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Re: best way to use 200k gift?

Post by natureexplorer »

Do you think living in a $200k place, even if paid for, will inevitably lead to living beyond your means?

How will your parents handle the gift tax issue?
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Watty
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Post by Watty »

Your parents might be subject to a gift tax if they give it to you all at once.

Ditto

best way to use 200k gift?
Investing some of it in your skills might help your salary some and have a better return than many financial investments. No matter what you do I would think that there would be something that you could spend $10K of it on to acquire skills that would help your career.

If I remember correctly there are all sorts of issues with getting a mortgage for a coop because of the ownership structure. Some lenders add extra fees or give a higher interest rate for "small" loans. Some lenders may not want to make a $100K loan. In your case paying cash for the coop may be more attractive since you will not be in a real high tax bracket after your 401k contributions.

I do not know about your local market but a cash offer might be able to get better purchase price than one with a financing contingency. Lenders have gotten real picky and a lot of people have trouble getting approved for a mortgage so sellers are nervous about having the sale close.

There is also the question of the family dynamics which makes this money a bit different than if you had gotten it somewhere else. Even if you invest it well it could still go down 50% and losing that much could be an awkward topic to discuss over the Thanksgiving table even if no one talks about it. At least with real estate if it goes down you can just shrug and point out that you are living rent free and will likely do fine if you stay there for a long time.


My gut feel is that yes the general rule would favor getting a mortgage, but you are likely in a situation that is an exception to the general rule. I see nothing wrong with buying the coop for cash, if you will be OK living there for at least 10 years.

Greg
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White Coat Investor
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Post by White Coat Investor »

I'd gradually convert it to tax-protected assets by living off it while deferring salary. I'd just roll it into my regular old AA/investing plan. BTW you have a huge e-fund relative to your portfolio.

Be sure the gift tax issue is addressed. It might be better for them to give you $26K a year for 8 years.

This sum of money this early in life relative to your salary is HUGE. It might allow you to retire 10+ years earlier if invested wisely.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Watty
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Post by Watty »

EmergDoc wrote: Be sure the gift tax issue is addressed. It might be better for them to give you $26K a year for 8 years.

It is way out of my area of knowlege but I would also suspect that there might be someway for the parents to buy the COOP in some sort of family trust that would eventually go to the OP.


Greg
natureexplorer
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Post by natureexplorer »

Word on the street is that gift tax is often evaded.
FredPeterson
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Post by FredPeterson »

Unless vacations are a regular occurence already, go on one. Then worry about the money otherwise.
Ben24
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Post by Ben24 »

Buy something below your means.

Then cap off emergency fund > retirement accounts > then rest in taxable/buy something small
etherscreen78
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Post by etherscreen78 »

2009 or 2010 bordeaux first growths. just kidding :)

park it somewhere safe for 6 months, then once you've figured it out, trickle it into the market and maybe a little something nice for you and your family since you can't take it all with you.
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3CT_Paddler
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Post by 3CT_Paddler »

Watty wrote:
EmergDoc wrote: Be sure the gift tax issue is addressed. It might be better for them to give you $26K a year for 8 years.

It is way out of my area of knowlege but I would also suspect that there might be someway for the parents to buy the COOP in some sort of family trust that would eventually go to the OP.


Greg
This... I would talk with some kind of tax attorney/estate lawyer about this possibility.
Topic Author
genjix
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Post by genjix »

Yeah the gift tax was something I thought of before but it slipped my mind and you guys reminded me. I'll have to find out about that, if my parents can get the coop under both our name and that possibly voids the gift tax? or maybe I will take it over a span of 8 years.
bdpb
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Post by bdpb »

Before buying a coop be aware of the issues with selling. It seems to
work differently than most real estate transactions. See the following
post for another posters headaches.

http://www.bogleheads.org/forum/viewtop ... sc&start=0
.
golfallday
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Post by golfallday »

The donor is responsible for paying federal Gift Tax. Certainly, the donee may agree to pay it.

Great advice has been given. I'd invest it. Since it wll have to be invested in a taxable account, you might want to talk to some people at Vanguard. They'll come up with something that mitigates the tax bite.
Oneanddone
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Post by Oneanddone »

Are either of your folks in danger of giving away $5,000,000 combined between now and death? If not, federal gift taxes aren't an issue. Depending upon your state, there may be some state issues.
mall0c
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Post by mall0c »

So much misunderstanding of the gift tax. $200k will not trigger any gift tax unless they have already given you over $1M previously, which is the lifetime exclusion amount. They will have to fill out a form though, but no tax.
Oneanddone
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Post by Oneanddone »

It is now $5 million and not $1 million.
mall0c
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Post by mall0c »

I think maybe just for this year? Either way, it's a big number and $200k won't trigger it unless the OP got significant gifts in the past, in which case he/she's already figured out the tax issues.
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genjix
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Post by genjix »

mike_slc wrote:I think maybe just for this year? Either way, it's a big number and $200k won't trigger it unless the OP got significant gifts in the past, in which case he/she's already figured out the tax issues.
I have never received any other gift from parents before, and will definitely not exceed 1 million in gifts in lifetime. So I am able to get the entire sum without any tax penalties on either party?

From the poster above, ok thanks for clearing up federal level, i guess I'll have to look into state and city level, NYC.
mall0c
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Post by mall0c »

Consult professional help, but it looks like you are your parents are safe:

http://www.ehow.com/facts_6927846_new-y ... x-law.html
Dandy
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Post by Dandy »

I think some people are confusing "estate tax" with "gift tax". I believe the OPs parents are alive and are selling their house and GIVING their son $200k. That makes the PARENTS subject to gift taxes not the OP. There is a limit to the amount you can gift to another person in a year without paying a gift tax. It used to be $10k but it is a bit more.

I am not a tax expert and don't know how the IRS would know -- but I would check it out.
Topic Author
genjix
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Post by genjix »

Dandy wrote:I think some people are confusing "estate tax" with "gift tax". I believe the OPs parents are alive and are selling their house and GIVING their son $200k. That makes the PARENTS subject to gift taxes not the OP. There is a limit to the amount you can gift to another person in a year without paying a gift tax. It used to be $10k but it is a bit more.

I am not a tax expert and don't know how the IRS would know -- but I would check it out.
its now $13,000 from each parent, but a few posters above mentioned only if you exceed $1 mllion dollars.
http://www.ehow.com/facts_6927846_new-y ... x-law.html

also if you deposit 200k in your bank account the IRS would know unless you plan to keep 200k cash in your house.
Gill
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Post by Gill »

Dandy wrote:I am not a tax expert and don't know how the IRS would know -- but I would check it out.
It's not a question of "how would the IRS know?" That's hardly the standard by which we determine tax compliance. Ours is a voluntary system, but there can be severe penalties for noncompliance.
Bruce
Dandy
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Post by Dandy »

Bruce
-I did not mean to imply that the OPs parents should avoid paying taxes --After all, I am the one indicating that they may have this liability.

It is just one of the few tax liablilities that is little known and not reported by any outside entity such as a bank etc. I pay my taxes.
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