Financial arrangement for in-laws in guest house

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marcopolo
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Financial arrangement for in-laws in guest house

Post by marcopolo » Wed Oct 04, 2017 1:01 pm

We are in the process of building a retirement home which we hope to move into about 20 months.

Adjacent to the main house, we are building a semi-attached guest house (other side of garage from main portion of house) with full kitchen, living room and bedroom. The intent of this space is for my elderly in-laws to move into it soon after we get settled so that we are able to provide support as they age. Providing this support is something my wife and I feel strongly that we want to do. We are very close to them (many vacations together, have lived with them previously while building our current house), so i have no concerns about us getting along, having separate living spaces should help as well.

The question I have for this forum is how to handle the financial aspects of this. My inclination is to pay for it and have them live there as our guests, they are family after all. At most, maybe they help with some utility costs. We can afford to do this without any risk to our own finances. They have stated that they are not comfortable with this. They would like to pay market rent (they are financially secure and can afford this). But, I really don't want to deal with the rental income aspects of this (report as income, now do i depreciate portion of the house, etc., Ugh!). Alternatively, they have suggested that they lump-sum gift us an amount equal to the incremental construction costs for the guest house portion, then live there rent free. To me, that feels like taking advantage of them. Also concerned if that creates any sort of implied partial ownership of the property on their part? We definitely want to make sure the we (my wife and I) own the property in entirety.

So, how would you handle this situation? any other options to consider?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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dm200
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Re: Financial arrangement for in-laws in guest house

Post by dm200 » Wed Oct 04, 2017 1:08 pm

marcopolo wrote:
Wed Oct 04, 2017 1:01 pm
We are in the process of building a retirement home which we hope to move into about 20 months.
Adjacent to the main house, we are building a semi-attached guest house (other side of garage from main portion of house) with full kitchen, living room and bedroom. The intent of this space is for my elderly in-laws to move into it soon after we get settled so that we are able to provide support as they age. Providing this support is something my wife and I feel strongly that we want to do. We are very close to them (many vacations together, have lived with them previously while building our current house), so i have no concerns about us getting along, having separate living spaces should help as well.
The question I have for this forum is how to handle the financial aspects of this. My inclination is to pay for it and have them live there as our guests, they are family after all. At most, maybe they help with some utility costs. We can afford to do this without any risk to our own finances. They have stated that they are not comfortable with this. They would like to pay market rent (they are financially secure and can afford this). But, I really don't want to deal with the rental income aspects of this (report as income, now do i depreciate portion of the house, etc., Ugh!). Alternatively, they have suggested that they lump-sum gift us an amount equal to the incremental construction costs for the guest house portion, then live there rent free. To me, that feels like taking advantage of them. Also concerned if that creates any sort of implied partial ownership of the property on their part? We definitely want to make sure the we (my wife and I) own the property in entirety.
So, how would you handle this situation? any other options to consider?
In my opinion, a lot depends on all the details.

1. Consult with a CPA, but I suspect the collecting rent (at a defensible market value) and considering this a "rental" (once set up) may not be that big a deal - especially considering it may give you a tax break.

2. BEFORE considering the rental option, are you 100% sure an actual rental complies with all laws, regulations and zoning of the property? Only proceed with #1 if it is all 100% OK.

3. I would stay away from any kind of actual or implied ownership in any aspect of this by them.

4. If not renting, consider letting them pay all of the direct and indirect utility costs - my guess is that that will not cause tax complications.

5. They could (I think) always make annual or monthly gifts to you as family - no tax impact as long as the gifts were not directly tied to the living arrangements.

ResearchMed
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Re: Financial arrangement for in-laws in guest house

Post by ResearchMed » Wed Oct 04, 2017 1:11 pm

marcopolo wrote:
Wed Oct 04, 2017 1:01 pm
We are in the process of building a retirement home which we hope to move into about 20 months.

Adjacent to the main house, we are building a semi-attached guest house (other side of garage from main portion of house) with full kitchen, living room and bedroom. The intent of this space is for my elderly in-laws to move into it soon after we get settled so that we are able to provide support as they age. Providing this support is something my wife and I feel strongly that we want to do. We are very close to them (many vacations together, have lived with them previously while building our current house), so i have no concerns about us getting along, having separate living spaces should help as well.

The question I have for this forum is how to handle the financial aspects of this. My inclination is to pay for it and have them live there as our guests, they are family after all. At most, maybe they help with some utility costs. We can afford to do this without any risk to our own finances. They have stated that they are not comfortable with this. They would like to pay market rent (they are financially secure and can afford this). But, I really don't want to deal with the rental income aspects of this (report as income, now do i depreciate portion of the house, etc., Ugh!). Alternatively, they have suggested that they lump-sum gift us an amount equal to the incremental construction costs for the guest house portion, then live there rent free. To me, that feels like taking advantage of them. Also concerned if that creates any sort of implied partial ownership of the property on their part? We definitely want to make sure the we (my wife and I) own the property in entirety.

So, how would you handle this situation? any other options to consider?
You aren't planning to deduct any of the costs of this additional unit, correct?

Assuming not, then how about if you figure something together that might be a bit lower than market rent (after all, it's sharing with someone else, and non-family might not want that!), and perhaps they gift you an amount each year such that it doesn't exceed the gift tax exclusion. There would be four allowed, from each parent to each of you.

Would that work in terms of everyone's comfort level?

(IF you get into declaring "rental property" deductions, then there are some "gotcha's" in terms of IF you rent for under market value to relatives.
Note: I am NOT familiar with whether there are any tax consequences of having relatives live rent free with someone... just in case there are any issues there.)

Also make *sure* that having a second unit (including a kitchen with stove) complies with zoning laws.

RM
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Meg77
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Re: Financial arrangement for in-laws in guest house

Post by Meg77 » Wed Oct 04, 2017 1:14 pm

Just let them gift you money each year as they see fit. Then there are no contracts, no tax implications, and they can stop or adjust the amount over time if they want/need to. Individuals can give other individuals up to $14,000 a year tax free without having to even report it to the IRS. So the two of them could gift you and your wife up to $56,000 a year if they wanted to. If the lump sum they are talking about giving you is less than that, then it probably makes sense to let them do that as a one time gift.

If you feel bad about taking their money, you can donate the funds to charity. But they are trying to maintain their dignity here, so if they feel strongly about giving you some money then I'd take it. You'll probably inherit it eventually anyway, which they surely realize.
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marcopolo
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Re: Financial arrangement for in-laws in guest house

Post by marcopolo » Wed Oct 04, 2017 1:20 pm

Meg77 wrote:
Wed Oct 04, 2017 1:14 pm
Just let them gift you money each year as they see fit. Then there are no contracts, no tax implications, and they can stop or adjust the amount over time if they want/need to. Individuals can give other individuals up to $14,000 a year tax free without having to even report it to the IRS. So the two of them could gift you and your wife up to $56,000 a year if they wanted to.

If you feel bad about taking their money, you can donate the funds to charity. Or better yet - save the gifts up to use on a health care aid or additional care they may need that in the future.
I like this approach. No concern that any such gifts might be viewed as "rent"? I would certainly not view it that way, because they could live there whether they gave us anything or not. But, would the IRS view it the same way?
Once in a while you get shown the light, in the strangest of places if you look at it right.

renue74
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Re: Financial arrangement for in-laws in guest house

Post by renue74 » Wed Oct 04, 2017 1:21 pm

Meg77 wrote:
Wed Oct 04, 2017 1:14 pm
Just let them gift you money each year as they see fit. Then there are no contracts, no tax implications, and they can stop or adjust the amount over time if they want/need to. Individuals can give other individuals up to $14,000 a year tax free without having to even report it to the IRS. So the two of them could gift you and your wife up to $56,000 a year if they wanted to.

If you feel bad about taking their money, you can donate the funds to charity. Or better yet - save the gifts up to use on a health care aid or additional care they may need that in the future.
+1 Do this.

I'm not sure how you are setting up the 2nd residence as far as property taxes and utilities, but where I live, it's currently not to code to create 2 residences on the same lot in the city. Yes...duplexes in the past were grandfathered in. Another issue we have in our state is that rental property is taxed at higher 6% rate...sort of like a 2nd house. So...you may want to steer clear. That may be a factor for you or not.

I would keep it simple. If the in-laws must pay something to feel good, let them gift you.

sailaway
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Re: Financial arrangement for in-laws in guest house

Post by sailaway » Wed Oct 04, 2017 1:22 pm

What were the arrangements when you lived with them?

mouses
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Re: Financial arrangement for in-laws in guest house

Post by mouses » Wed Oct 04, 2017 1:23 pm

I would make some sort of arrangement so that if your part of the family gets run over by the proverbial truck, your in-laws at least have enough time to find another place to live and don't lose some substantial amount of money as a result of whatever arrangements you both make.

Do you want the housing units separated by the garage? My family and grandparents split a duplex, but only a small area was between the units, a door on each side and a few feet of a landing between the doors. The doors connected to the kitchens. There was a similar connection between the living rooms. So, no privacy issue. I am thinking if they need your help and can't phone or walk the shorter the distance the better.

Nearly A Moose
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Re: Financial arrangement for in-laws in guest house

Post by Nearly A Moose » Wed Oct 04, 2017 1:34 pm

This sounds like an intergenerational wealth transfer issue, not a rental issue. You're housing your in laws just like you might house a recent college grad who needs a place while she gets her feet under her - you're not obligated to but are doing so out of the kindness of your hearts. And it's an estate planning issue for your in laws. They've arranged their care while they age in place (via you), and they can separately decide to start transferring their wealth to you. I'd suggest viewing it that way. They can determine how much "early inheritance" they want to give you. I would just accept it but don't make them staying in the house contingent on any payments. If you feel bad about accepting it, just set it aside in a separate account or fund with the goal of not touching it while they're living. That way, if they run into financial issues, need expensive in home care, or something similar, you can just pay for it with that fund.

Think about it this way: if your kids did the same for you, wouldn't you want to do something to make it feel like you're not a burden?
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marcopolo
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Re: Financial arrangement for in-laws in guest house

Post by marcopolo » Wed Oct 04, 2017 5:28 pm

Thanks everyone for the thoughtful replies, I love this forum!

I think I was probably over thinking this.
Based on suggestions here, talked it over with my wife. We will proceed as several have suggested.
They live there as our guests. If they feel the need to pay us back in some way, they can gift as little or as much as they wish to us under the gift rules exclusions. But, there would be no expectation of them doing so, and them staying there certainly would not be contingent upon it.

We will present this approach to them to make sure they are comfortable with it as well.

Thanks again!
Once in a while you get shown the light, in the strangest of places if you look at it right.

Gill
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Re: Financial arrangement for in-laws in guest house

Post by Gill » Wed Oct 04, 2017 7:52 pm

Why are you even worrying about the annual gift tax exclusions? If they exceed that, so what. Just file a gift tax return.
Gill

Ruger
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Re: Financial arrangement for in-laws in guest house

Post by Ruger » Wed Oct 04, 2017 8:47 pm

marcopolo wrote:
Wed Oct 04, 2017 5:28 pm
Thanks everyone for the thoughtful replies, I love this forum!

I think I was probably over thinking this.
Based on suggestions here, talked it over with my wife. We will proceed as several have suggested.
They live there as our guests. If they feel the need to pay us back in some way, they can gift as little or as much as they wish to us under the gift rules exclusions. But, there would be no expectation of them doing so, and them staying there certainly would not be contingent upon it.

We will present this approach to them to make sure they are comfortable with it as well.

Thanks again!
I think this is the best solution. As Meg77 said, they want to maintain their dignity. They don't want to look like moochers. I went through this with my mother who wanted to pay me every time I took her to the doctor or helped her out. I always refused, we compromised by her taking me out to lunch instead. It worked out well for both of us, neither one of us felt like we were taking advantage of the other.

marcopolo
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Re: Financial arrangement for in-laws in guest house

Post by marcopolo » Wed Oct 04, 2017 9:36 pm

Gill wrote:
Wed Oct 04, 2017 7:52 pm
Why are you even worrying about the annual gift tax exclusions? If they exceed that, so what. Just file a gift tax return.
Gill
Fair enough. But, I really do hope their gifts are not that large.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Saving$
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Re: Financial arrangement for in-laws in guest house

Post by Saving$ » Wed Oct 04, 2017 10:13 pm

They are family. Plenty of family live together and share expenses, or live together and don't share expenses... Just treat it like a housemate situation, and decide on what their portion of the ''shared" expenses should be.

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