Author Topic: How do I get out of this mess? Help!  (Read 4172 times)

The_Learning1

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How do I get out of this mess? Help!
« on: July 26, 2014, 10:03:14 AM »
My situation is so messy, bizarre, and seemingly impossible to resolve.  I've been reading a lot on this forum and there seem to be a lot of wonderful, helpful, non-judgmental people out there.  So please give me some good advice! I don't know how to resolve this. I apologize for the length of the post.  It's a good news/bad news story and I don't know how else to explain it.

I earn $200,000 a year.  My wife doesn't work because we have moved a great deal in my career and she's been following me, picking up work in different countries we live in, but the last two years haven't worked out for her in terms of employment and as I am 52 and she's 51, age discrimination may be kicking in. (She's also not from the US and has a foreign accent.) 

We own an apartment, long term rented out, which is worth about $260,000 and has a $19,000 mortgage.  It's in a foreign country, we can't sell it without a 60 percent capital gains tax so even though it's basically a slight money loser (a couple hundred dollars a month, on average) we are waiting until we retire, move back there, live there legally for a year, and can shelter it 100% from tax at sale. It's kind of our retirement nest egg but we can only access it AFTER we've retired and moved there.  (It's in a really beautiful spot.)

We own another house in the United States near my corporate HQ which we bought for  $260,000 (I've posted about just this house before elsewhere on this forum, for advice whether or not to sell.) Here are the details:

Market Value: Hard to assess, but a local discount broker told me to put it on the market for $450,000 and he said he could sell it quickly.  Zillow (Zestimate) claims (apparently on basis of comparable prices per square foot in the area) that its value is $600,000.  Redfin says between $450,000 to $650,000

Original Purchase price:  $260,000
Original Mortgage Amount: 234,000
Interest Rate: 3.25%
Mortgage Term: 15 years
Term remaining: 12 years
Amount remaining on mortgage: 199,000
Gross Rents: *

Here's the tricky part.  I am overseas.  My gross rents were $41,149 last year but I have a full service management contract and all rental expenses are deducted so I only get the amount that comes after all expenses.  last year that was 19,447.  My house is across the street from a medical school so I rent out short term to doctors in residency.  I have cleaning services, trash collection, everything taken care of for these tenants.  (Who are ideal tenants, they work all the time, don't party, are spotless.  But because they are short term I pay VERY high insurance, reflected in my escrow accounts, because I am considered to run "a boarding house" and insurance is very high for this.)
Here's my mortgage:
Payment:   $2,773.96
Principal and Interest: $1,644.25
City Tax:   $536.30
Hazard Escrow: $417.95

So this house is basically a wash, financially.

Also have $530,000 in our 401K.  Saving that for when we get really old & the rules don't allow me to touch out until I am sixty.  And I am not allowed to take a loan from it for any reason.  (Believe me, I've tried.)  Another $10,000 in a Roth IRA (for a rainy day in retirement)

Separately we have a $5,500 monthly pension, defined benefit, which I am eligible for as soon as I retire but ONLY after I retire.  It's for life with automatic COLA increases.  I am already vested for retirement so I could retire tomorrow if I wanted to.  So all is good, right? !BUT!:

Our finances are a disaster.  We have a credit score 0f 640. Three years ago I had a terrible bike accident at a bad time: we were in the middle of rehabilitating our house, it was stripped down to the studs in places, and we were living in it as well.  We had two kids in (expensive, private colleges) My bike accident essentially incapacitated me for about half a year (couldn't lift arms, lift anything, even paint.  nothing.  nada).  We ended up taking out a Home Equity Line of Credit, which is now still maxed at $50,000 & paying lots of contractors on credit cards.  We have $40,000 in credit card debt.  One child now finished college (break out cheap champagne here); other is now finishing and essentially financially independent.  We have two cars now, necessary for work.  (really really necessary for work, no choice even though I hate it)  No cable.  No expensive hobbies.  No vacations in two years.  ("Staycations")  No expensive hobbies, really.  We read library books.  I get $7,000 net salary a month.  (Big deductions to pay for my great pension.)  I also have to pay the IRS $1000 a month (for another 7 months only, thank God) for a tax filing error I made three years ago. The IRS won't accept less than $1000 a month.  The good news is that I've paid it down from more than $40,000!

I plan to sell the US house near my HQ when I retire.  (I am in employer housing now, outside the US.)

Here's the crisis.  I feel that I am asset rich, bad debt desperate, and living hand to mouth entirely unnecessarily.  The solution, I think, is to go to the bank, refinance for an interest only loan to the US house, pay off the credit cards, and then just bank the $300,000.  But our credit score is so bad, nobody wants to touch us.  Besides the house in the US is not owner-occupied so can't get a mortgage refinance.  My bank won't lend me money personally to pay off credit cards because my credit card debt too high.  (Although they're happy to offer me ONLY, no other option, a thirty year refinance which I think would be insane.)  Every month with 7,000 in salary and 2800 in net rents and the cost of carrying my foreign apartment I barely make the minimum payments. So I can't get off the treadmill, even though I think I am relatively well off if I could just redeploy my finances more effectively. 

How do I get out of this mess?  What's the magic bullet???  Help!




« Last Edit: July 26, 2014, 10:06:25 AM by The_Learning1 »

oldladystache

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Re: How do I get out of this mess? Help!
« Reply #1 on: July 26, 2014, 10:13:00 AM »
Sell the US house, pay off all debts, live happily ever after.

lhamo

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Re: How do I get out of this mess? Help!
« Reply #2 on: July 26, 2014, 10:51:03 AM »
We need a detailed breakdown of your expenses.  You should not be living paycheck to paycheck with nearly $10k in take home income/month, in spite of the taxes and level of debt you have.   What country are you living in now?  I am guessing you are living a very typically overinflated expat lifestyle that could easily be cut back dramatically to clean up your debts and put you on better financial footing. 

Start tracking your expenses and figure out where the waste is going.  With the kids out of college and your income, you should be able to clean this up quickly.

Good luck!

MayDay

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Re: How do I get out of this mess? Help!
« Reply #3 on: July 26, 2014, 11:03:26 AM »
Just throwing out some numbers.  7k take home. 1k irs, 1k credit card, 1k HEL. Still leaves 4k and that doesn't include needing to pay housing. Seems like you could live on 2-3k a month, throw an extra 1-2k at the credit card, and get rid of it in 18 months or so. Or, sell the US house now and wipe out all the debt right now, then retire. Walla.

Zamboni

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Re: How do I get out of this mess? Help!
« Reply #4 on: July 26, 2014, 11:06:18 AM »
I'll second selling the US house and paying off all of your other debts.  Perhaps there was something in the other thread, but I don't understand why you are keeping that house?  Are you planning to move back there are some point?  Are you doing it to "keep up appearances" with the people at corporate HQ?  If you didn't have the high interest debts, then keeping it would be fine, but it would feel nice to pay off all of those debts, wouldn't it?

The_Learning1

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Re: How do I get out of this mess? Help!
« Reply #5 on: July 26, 2014, 12:03:29 PM »
I will detail the expenses shortly.  Regarding keeping the principal house, two reasons:

(a) the first is that it's located on a street that's being regraded and expensively upgraded.  It's a 20 million improvement and I believe will substantially raise the value of the house, which currently is sitting on huge construction site.  It will be done in December 2015.  The house will be sold at a steep discount until the construction is done on the street in front.

(b) I accidentally converted the house into a rental by renting it out.  My thought is to move back there a year when I retire, get my act together, change it back into my principal residence, then sell it at 55 and shelter 500,000 of the capital gains.  Then move to my European apartment.

(c) I am in sales and marketing.  Yes that's why I have a lot of expenses.  My expense account covers formal events (which can be outrageously expensive) but daily meals with low level clients, employees (I am expected to pay), and the regular wedding/bar mitzvah/first communion presents to my staff and employees I just have to eat.  That's company policy and as the CEO of my geographical division I can't get out of this.  It kills me but it's a necessary cost.  I realize people on this forum have a healthier attitude toward that stuff.  I hate the lifestyle although I love the work.  Want to get out because I hate the luxury lifestyle even though I love the work.  I am a camping and hiking guy living in a Ritz Carlton world utterly against my desires.

NoraLenderbee

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Re: How do I get out of this mess? Help!
« Reply #6 on: July 26, 2014, 05:58:24 PM »
It seems to me that you currently cannot afford to support the assets that you have. You have a hair-on-fire debt emergency. You need to sell one of your properties and knock out a big chunk of the debt so that you can do more than barely make the minimums on the rest of the debt. It's pretty obvious. Nobody likes to pay taxes, but you are drowning today because you are trying to protect a profit that's in the future. Time to bite the bullet and sell something.

Cpa Cat

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Re: How do I get out of this mess? Help!
« Reply #7 on: July 26, 2014, 06:24:00 PM »
Remember that the gain on your home will be determined by its basis.

Basis = Purchase price + Reno + Selling costs - depreciation.

Are you sure you need to shelter 500K? How close are you to meeting the 2 out of 5 year requirement for the primary residency exclusion? Can your wife move back for a couple of months and sell it with a $250k exclusion?

bacchi

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Re: How do I get out of this mess? Help!
« Reply #8 on: July 26, 2014, 06:33:15 PM »
Yes, quite  a puzzle.

Do you know what your expected retirement expenses would be? Housing, travel, cars, etc.? Can the pension cover that? More money is always better but taking a tax hit on one of the properties would relieve a lot of stress.

former player

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Re: How do I get out of this mess? Help!
« Reply #9 on: July 26, 2014, 07:17:19 PM »
You have income of $200,000 per year to support you and your wife, which you say translates into $7,000 a month net.  Where does the other $116,000 per year go?  Is there anything you can do to make any of this available to you to pay off the debts? 

You have had a big financial crunch in the past 3 years.  Part of that was your accident, part of it was putting two kids through "expensive private colleges".  But even so, you have paid off $33,000 in tax debt during those three years.  You now have spare income from no longer supporting your children, and at the end of the year will have spare income from paying off the IRS debt, so things are already a bit better for you than they were, and at the end of the year will get better still.  If you now through everything at your highest interest debts, given the extra wriggle room in your new budget you should make decent progress.

Your limiting factor is how long you want to keep working.  If you want to retire rather than carrying on with the grind of paying your debts out of income, you need to sell the US house.   If you can carry on working and paying debt for another 2 years, the construction work in front of the house will be finished and (depending on market conditions at that time) it may fetch more than it would now.  Is the potential for that extra money worth the extra two years of work?  Only you can decide that.

taekvideo

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Re: How do I get out of this mess? Help!
« Reply #10 on: July 27, 2014, 10:28:14 AM »
(b) I accidentally converted the house into a rental by renting it out.  My thought is to move back there a year when I retire, get my act together, change it back into my principal residence, then sell it at 55 and shelter 500,000 of the capital gains.

Hmm I thought you couldn't convert it back after the fact anymore... might want to doublecheck the law on that

Cpa Cat

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Re: How do I get out of this mess? Help!
« Reply #11 on: July 27, 2014, 12:04:53 PM »
(b) I accidentally converted the house into a rental by renting it out.  My thought is to move back there a year when I retire, get my act together, change it back into my principal residence, then sell it at 55 and shelter 500,000 of the capital gains.

Hmm I thought you couldn't convert it back after the fact anymore... might want to doublecheck the law on that

The gain that can attributed to the rental years can't be converted back. No matter what he does. So if he has the house for 5 years and he has 500k of gain and 2 of the years were personal residence years and 3 were rental years, then 3/5 of the gain (300k) cannot be excluded. But 200k still can. Also gain from depreciation cannot be excluded.

Which is why I think, if he has the 2 out of 5 year residency requirement right now, then he should just suck it up and sell it. It will alleviate a lot of stress and possibly work out just as well as waiting for it to appreciate, then living it in for 2 years. This tax situation doesn't really get better by sitting on it.

That said, I agree that he should take this to a tax professional.


socaso

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Re: How do I get out of this mess? Help!
« Reply #12 on: July 27, 2014, 01:08:36 PM »
I have heard people in tough situation like your give all the complicated reasons why they can't do anything about their situation and almost every time I think that there are bigger emotional reasons why they aren't doing anything. Your injury created a bad financial situation and now you don't have many choices that don't include you taking some kind of financial hit. I agree with the person who suggested seeking the advice of a tax pro to help you determine which way you need to go but one of your properties needs to be sold. You should feel glad that you have the retirement savings that you do and that you have two properties that are not underwater. AND you have a pension coming to you in retirement!! That's like having a unicorn in your backyard.

Maybe the life lesson here is to have some liquid cash for emergencies. You only mention your retirement savings and that your accident caused you to have to take out loans so it sounds like you might not have an emergency fund.