The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: robartsd on September 27, 2017, 10:12:51 AM
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My father recently passed away. I will be administrator of his estate. After taxes, administration, and funeral expenses, his estate will be out of money (even after liquidating personal property). I'm uncertain, but I believe Dad's unsecured debt will be on the order of $10K. Dad owned a small 720 square foot 2 bedroom 1 bath house with attached single car garage. The house needs some repairs before it would be move in ready - replace carpets, repair or replace laminate floor in kitchen, repair or replace dishwasher and microwave. The "Zestimate" for the house is approximately equal to the balance on the HELOC. Further complicating things is the spa my dad installed a few years ago in the back yard without a permit.
If the estate were solvent, I would share an inheritance with 7 siblings, but none of us ever expected to get anything (other than a mess to deal with) from my dad and none of us have emotional ties to any of the things he had that have monetary value. The only thing in favor of keeping the property at all is California's Prop 13 property taxes - the house was purchased by my grandfather in 1941, so taxes have been less than $600/yr. Considering the current value of the property tax savings (which only applies if it stays in the family) the estate might actually be worth more than nothing.
If the estate were solvent, it would likely make sense to renovate (either to increase the selling price more than the cost of renovations or to keep as a rental property). I could probably afford to put up the money for renovation, but I'm not sure how I could protect my interest. Perhaps I could structure it as a loan to the estate secured by whatever equity is left after the HELOC is paid off.
Currently the HELOC is scheduled to miss its first payment early in October. If the house will be liquidated by the estate without renovation, there is no reason to make any further payment on the HELOC.
The options I see:
1) pay nothing further on the house, liquidate it as quickly as possible (likely a short sale/foreclosure), then close the estate.
2) renovate the house to sell at price high enough to pay off HELOC and renovation loan provided by me, then close the estate (I'm not sure the house would be worth enough for this option).
3) renovate the house and rent it out - income from property could make estate solvent over time. In this scenario, the estate woulld own the house and pay expenses (including property management fees to me) from rental income. If I wanted to continue holding the house as a rental myself, I could attempt to close the estate at near zero net worth and buy out my siblings shares. The big disadvantage here is the cost of estate income taxes.
If I were on the other side of the deal under option 1, I would certainly be looking to flip the house. Holding this property as a rental seems more like a bet on appreciation than a true income property.
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Because there are seven siblings involved, I'd short sell it or otherwise get rid of it ASAP unless one sibling wants to buy the others out to retain the property tax benefit. Otherwise, if one sibling dies, divorces, or is incapacitated you're going to have a HUGE mess on your hands going forward if each sibling has an equal interest in the estate. That kind of headache might be worth it if it was a mansion on Martha's Vineyard, but for the property you're describing it just doesn't seem worth it.
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What LMM said. I'm the co-trustee and co-executor of my parent's estate. I am one of "only" six children. All but one are amicable, but that one is a complete nightmare.
The dollar signs you see in the future could come at great cost.
[Insert chorus of "Let It Go" here.]
ETA: I'm so sorry for your loss. It sounds like your Dad was a character. I hope you have lots of great stories.
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I agree to the liquidate option. Nothing prevents a sibling from buying it during liquidation, does it? If that happens, are they able to inherit the property taxes?
If one sibling wants to purchase from the estate at market value, before liquidation, that should be an option too...
In any event, get it sold soon.
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Dad was always very poor with personal finance. He was also not good at maintaining family relationships. He was good at community involvement/service (volunteered at schools, worked elections, served at church, etc) until his healt declined enough that he was no longer able.
I don't anticipate any problems from my siblings. A few will offer some help in sorting Dad's stuff, but none expect an inheritance or are willing to take on any responsibility for handling Dad's affairs. My efforts will primarily pay for Dad's final expenses; but there is a chance that there will be a little bit of money to pay myself for administration (certianly not a reasonable rate).
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Prop 58 covers parent to child exclusions from revaluation. Sibling to sibling transfers do not qualify. You would need to consult an attorney experienced in parent to child exclusions to determine if there is a way for the estate to transfer the property to one child without transfers from the siblings.
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If your estimate of the property's worth and cost are accurate, and with 7 owners, I would get rid of it asap.
As in, contact the bank, tell them the estate is broke and unable to continue to pay for the house.
Ask if they will take the keys to the place in return for considering the loan paid off. (Double-check the wording of that to make sure you won't get hit for taxes on that.) Or if they would prefer to have it abandoned and not kept in repair for the months or years it takes to get it foreclosed.
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Prop 58 covers parent to child exclusions from revaluation. Sibling to sibling transfers do not qualify. You would need to consult an attorney experienced in parent to child exclusions to determine if there is a way for the estate to transfer the property to one child without transfers from the siblings.
I am pretty sure kids could buy the house from their parents... and qualify. ? Zillow is filled with sales history of these "inside family" purchases... The question is if they can do that without paying the negative equity, and if they can buy it from the estate to qualify for the parent to child exclusion..?
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Prop 58 covers parent to child exclusions from revaluation. Sibling to sibling transfers do not qualify. You would need to consult an attorney experienced in parent to child exclusions to determine if there is a way for the estate to transfer the property to one child without transfers from the siblings.
I am pretty sure kids could buy the house from their parents... and qualify. ? Zillow is filled with sales history of these "inside family" purchases... The question is if they can do that without paying the negative equity, and if they can buy it from the estate to qualify for the parent to child exclusion..?
The law is very specific. Only parent to child transfers qualify for exclusion from revaluation under Prop 13. Sibling transfers do not. Property taxes vary from state to state and California's system is very different from those of other states.
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Out of courtesy, I'd probably contact the bank he owes, and discuss options.
Could be as simple as the estate signing it over to the bank and walking away from everything.
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I agree with all who said to get rid of it. Just unload it as fast as you can, however you do it. The property doesn't sound like it's worth the hassles it's going to cause. If you can, I'd just let the bank have it...but make sure you've consulted with the experts who know how it should be done. i.e. the bank people and maybe an attorney.
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I won't be able to do anything with the bank until after I am appointed administrator by the court (anticipate about end of October - early November at latest; still working on the paperwork - two siblings have not yet returned the bond waiver I asked them to sign). By that time one or two HELOC payments will have been missed. I will remove all his funds (~$3600) from the bank that holds the HELOC then start talking with them about what to do with the house making it clear that the estate has no funds available.
In the mean time I'm liquidating depreciating personal property. So far just a few craigslist posts for the largest items. Will work on getting shippable items on ebay soon, then follow with a yard sale later in October. Hopefully by the time I get letters of administration, the house will be cleared and ready for the bank to take over.
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Since you're in CA, are you sure the property isn't worth more? We own 4 single family homes. On two the Zestimate is laughably high, on the other two, it's crazy low. Use Zillow's much more useful "Neighborhood" tab for a snapshot of recent home sales in the vicinity. Check with a realtor as well. I still think selling it might be easier, but you do want to have all the facts before you decide.
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Regardless if you sell or renovate for rental, get rid of the spa and any wiring connections, etc. You don't want that liability.
Used spas (assuming a standalone hottub) are not worth much but I am sure someone will come and take it away.
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Regardless if you sell or renovate for rental, get rid of the spa and any wiring connections, etc. You don't want that liability.
Used spas (assuming a standalone hottub) are not worth much but I am sure someone will come and take it away.
Yes, a standalone hottub. I have switched off the breaker to it. I'm not very concerned about the wiring, Dad was fairly compentent with electrical work.
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Prop 58 covers parent to child exclusions from revaluation. Sibling to sibling transfers do not qualify. You would need to consult an attorney experienced in parent to child exclusions to determine if there is a way for the estate to transfer the property to one child without transfers from the siblings.
I am pretty sure kids could buy the house from their parents... and qualify. ? Zillow is filled with sales history of these "inside family" purchases... The question is if they can do that without paying the negative equity, and if they can buy it from the estate to qualify for the parent to child exclusion..?
The law is very specific. Only parent to child transfers qualify for exclusion from revaluation under Prop 13. Sibling transfers do not. Property taxes vary from state to state and California's system is very different from those of other states.
Okay, I am confused. Why is it a sibling transfer when the house is in the (deceased) father's estate, and his children are the ones involved? The executor can sell property in order to generate funds to clear out debtors, and to have funds to distribute allocations per the will. The house is not currently owned by the 8 siblings...
I could see that it might be considered a transfer from a bank-owned foreclosure property (executor releases it to the bank) to a buyer, which could the exclude the property tax revalutation, but why is it a sibling transfer?
My father recently passed away. I will be administrator of his estate
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Because that is the property tax law in California. In California, property taxes are based on acquisition value, not current market value. Changes in ownership cause the property to be revalued at current market value as of the transfer date. Death is a change in ownership and the transfer date is the date of death. Parent to child transfers may be excluded from reappraisal at current market value for calculation of property taxes and the parent's indexed base year value is the basis for property tax calculations.
If the estate in this case goes to all eight siblings, a one eighth interest interest in the property went to each child because of the death. Seven of the siblings would have to disclaim or transfer their interest in the property to the eighth sibling. The job of the estate administrator is to carry out the will or if there is none the inheritance laws of the state. The estate administrator cannot arbitrarily deed out the property to one sibling.
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I don't know enough about the relevant laws, but I think it might be possible to transfer the house to me from the estate with siblings receiving cash instead of real estate from the estate, thus satisfying property tax laws. It probably doesn't matter because as many have advised here, it would probably be best just to get rid of the house.
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Because that is the property tax law in California. In California, property taxes are based on acquisition value, not current market value. Changes in ownership cause the property to be revalued at current market value as of the transfer date. Death is a change in ownership and the transfer date is the date of death. Parent to child transfers may be excluded from reappraisal at current market value for calculation of property taxes and the parent's indexed base year value is the basis for property tax calculations.
If the estate in this case goes to all eight siblings, a one eighth interest interest in the property went to each child because of the death. Seven of the siblings would have to disclaim or transfer their interest in the property to the eighth sibling. The job of the estate administrator is to carry out the will or if there is none the inheritance laws of the state. The estate administrator cannot arbitrarily deed out the property to one sibling.
I meant for one person to buy the home from the estate at FMV before the estate is distributed...
Here, the transfer of property does not occur until it is released from the executor's hands once all debts have been paid, so the executor has the ability to sell property on behalf of the (now deceased) owner in order to complete the terms of the will. If the will did not specify other instructions, and the home is part of the estate without other encumbrances, the executor can sell property to generate cash for equal distributions. Note above -- the executor is selling other property from the home already.
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I don't know enough about the relevant laws, but I think it might be possible to transfer the house to me from the estate with siblings receiving cash instead of real estate from the estate, thus satisfying property tax laws. It probably doesn't matter because as many have advised here, it would probably be best just to get rid of the house.
Most of the problems others are warning against are due to multiple owners on a single piece of property. If one person could get the home as their sole possession, by paying FMV for it / negotiating with the bank for a purchase price, and still inherit the lower property tax base, it may make for an interesting consideration... the $$'s may or may not pay off, but there is a better chance that it could..
Secondary problems that others warn against is jealousy that one sibling has enough ready credit or cash to buy the property in full from the estate, or siblings still thinking of the property as their own when it no longer is. I think these are minor issues, however.
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Because that is the property tax law in California. In California, property taxes are based on acquisition value, not current market value. Changes in ownership cause the property to be revalued at current market value as of the transfer date. Death is a change in ownership and the transfer date is the date of death. Parent to child transfers may be excluded from reappraisal at current market value for calculation of property taxes and the parent's indexed base year value is the basis for property tax calculations.
If the estate in this case goes to all eight siblings, a one eighth interest interest in the property went to each child because of the death. Seven of the siblings would have to disclaim or transfer their interest in the property to the eighth sibling. The job of the estate administrator is to carry out the will or if there is none the inheritance laws of the state. The estate administrator cannot arbitrarily deed out the property to one sibling.
I meant for one person to buy the home from the estate at FMV before the estate is distributed...
Here, the transfer of property does not occur until it is released from the executor's hands once all debts have been paid, so the executor has the ability to sell property on behalf of the (now deceased) owner in order to complete the terms of the will. If the will did not specify other instructions, and the home is part of the estate without other encumbrances, the executor can sell property to generate cash for equal distributions. Note above -- the executor is selling other property from the home already.
For property tax purposes in California, the transfer occurs with the death. The underlying assumption is dead people cannot own property.
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It probably doesn't matter because as many have advised here, it would probably be best just to get rid of the house.
Oh dear Dog, please don't confuse volume of replies with accuracy of same. We could all be wrong.
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It probably doesn't matter because as many have advised here, it would probably be best just to get rid of the house.
Oh dear Dog, please don't confuse volume of replies with accuracy of same. We could all be wrong.
Getting rid of the house has always been the default option. I just was thinking about other possibilities and thought I might post a question here to get some feedback.
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It is possible (I put it no higher) that on death the property transfers to the estate. If 7 of the siblings made formal statements disclaiming their share of the inheritance, the property would then transfer from the estate to the remaining sibling. In that case the California tax law may be written in such a way that the remaining sibling gets the tax benefit.
But in this situation, where the remaining sibling would in effect have to pay full price or more for the house (to cover the estate's debts), I can't see it being worth doing - it's probably not even worth the cost of the legal advice that would be necessary. Plus the opportunity for one or more siblings to feel that advantage is being taken is too high. (Also, every time someone bilks the State of a property tax increase it just makes things a tiny bit worse for everyone else.)
I think OP needs to read, if he can find them, the contracts setting out the terms of the debts owed by the estate. They will probably have wording to deal with the situation he finds himself in. If he talks to the lenders, he needs to ask them for copies of the documentation about the loans. And then act in accordance with those obligations.