Pay Dirt is Slate’s money advice column. Have a question? Send it to Athena and Elizabeth here. (It’s anonymous!)
Dear Pay Dirt,
About eight years ago my daughter and her then-husband decided to build a home for themselves and three children here in northern Idaho. My wife and I had a vacant 10-acre parcel attached to our primary home of many years. We all decided that it made sense for my daughter and her family to build on our property, with the agreement that my wife and I would act as the bank and finance the build, partially to avoid the construction headaches that come with using a traditional construction loan, and partially to let us realize some interest income on money that was doing nothing in its current investment portfolio. The agreement was that after the home was complete, we would go to a real estate attorney, get a contract drawn up and they would begin their “mortgage” commitments. We would get to have our grandkids close by, and life would be good for all.
They moved into an RV on the property, and the son-in-law and I began the process of clearing land and getting a home started. Over the course of about 18 months, doing most of the work ourselves (we each had some construction experience and weren’t afraid of hard work), we managed to get the home about 60 percent complete.
Then things went awry. The daughter and son-in-law decided they couldn’t stay married. My daughter, being a full-time mother most of her adult life, didn’t have the financial means to continue with the house, and her husband was moving to Alaska for another woman. He wasn’t interested in completing the process, and was taking the good family income with him. Since the property was in my wife’s and my name, and we’d been financing the construction costs up to this point, we tried to salvage a rather bad situation by claiming ownership. I finished the home myself, the daughter and kids moved in. She lived there rent-free and finished her education, got her degree and a good job, met a new man and moved out to begin a new life with him.
Now we stand in a rather unusual situation. The last five years or so we haven’t been realizing any rental income. My daughter has been taking care of the utilities, etc. so they haven’t been in our name. We can’t really prove it as a primary residence, since it WASN’T. The question is, what do you think would be our best option (short of moving out of our home and residing for two years in the other home) to avoid capital gains taxes if we sell this home? I really don’t want to rent it. I’d really like to sell. But any advice that you have to help us minimize the financial hit of resolving this whole long story would be greatly appreciated.
—A Family Mess
Dear A Family Mess,
“Aside from making the other home your primary residence, and then selling and using the IRC code 121 exemption, there are other ways to sell the property and defer your capital gains,” says Atiya S. Brown from the Savvy Accountant. Brown has a few strategies she’s willing to share.
One way is to use a section 1031 exchange. This process is called a like-kind exchange. A like-kind exchange is a transaction that’s tax-deferred to help allow the disposal of an asset with another asset to avoid a capital gain tax liability. In order to do this, Brown shares, you would have to find another property to invest in within 45 days, and make sure you close within 180.
Another option is to sell and invest in a Qualified Opportunity Zone property or fund. “The new QOZ program allows you to use capital gains to invest in specific areas, or in funds that invest in those qualified zones, and you can defer your tax on the gain,” Brown says. To do this, you could seek out a real estate investment group to invest your money on your behalf. The real estate investment group can then identify qualified projects which fit your investment goals and then go from there.
“Unfortunately, unless you plan to reinvest your gain, there are no real ways to avoid the tax besides the primary residence exemption,” Brown says. My hope is that one of these options works for you. Good luck!
Dear Pay Dirt,
My partner and I have been together for a bit more than eight years. About six years ago, he purchased a house in North Carolina and the deed is entirely in his name. He has acknowledged that were anything to happen to him, he would want me to be able to stay in the house, but he tells me that he can only put my name on the deed if he refinances (which he doesn’t want to do), or when he pays off the house, which he is about seven years away from doing.
I love my partner, but he does struggle with depression and major health issues, and I am not only worried about him, but also about where I and our pets will go if anything does happen to him.
Because the house (which has tripled in value since he bought it) is not paid off, he doesn’t know if he can just leave it to me in his will. We have decided against marrying due to his large salary and my even larger student loan debt. I am listed as his domestic partner at his job, am on his health care, and am the beneficiary of his life insurance, but the partnership is not filed with the courts. His father has passed away, and he has no relationship with his mother or brother (he despises both and won’t speak with them), but I suppose they would technically be his next of kin. They are the type to gladly take the house without any care about throwing me and our pets out.
Is there anything we can do to ensure that if anything happens to my partner, I would be able to take over the mortgage payments and stay in the house?
—Thinking About Tomorrow
Dear Thinking About Tomorrow,
I’m so sorry you’re dealing with this. Depression is tricky, so I hope your partner is getting the help he needs. I hope you are taking care of yourself as well, but it sounds like you are, and that’s why you have written us over at Pay Dirt.
You are right to be worried about what would happen tomorrow if he should pass. Without a trust or will in place, his family would get everything as his next of kin. This is why it’s extremely important that you meet with an estate attorney as soon as possible. An estate attorney can help place the house in a living trust, which outlines his exact wishes on how to transfer ownership of the property. The Consumer Financial Protection Bureau has rules in place that would help you work with the mortgage company to take on his existing mortgage without fear of losing the home. Once the house is in the trust, if I were you, I would feel more comfortable and would be able to relax.
Since he does have limited family support, and if you are comfortable with it, I would also advise you to see if the estate attorney can help fill out proper medical documentation such as helping you get named as the responsible party, in his durable power of attorney for health care. If you haven’t yet discussed him allowing you power of attorney, you should, since he has many health issues and you would be the loved one who could respect his wishes. This could be a final gift to both of you in case the time comes.
Dear Pay Dirt,
I bought my first home about three and a half years ago. It was originally built in 1959. The downstairs has been updated in the relatively recent past, but there is an upstairs room that is straight out of the 1970s (American colonial wallpaper, faux wood paneling, fluorescent lighting, etc.). The plan when I bought the house was to save and remodel the upstairs room and kitchen at the same time, since they are connected by a staircase; the staircase is unsafe, since the steps are different heights, and leads to a half-landing, which is also where the attic access is through a halfway-up-the-wall mini-door.
I started having contractors come out who suggested the upstairs was unpermitted, which I ultimately found out it was (the seller didn’t disclose this, my realtor didn’t do a permit search, and the home inspection didn’t mention it could be unpermitted). Most contractors don’t seem to even want to do the work because of the liability they may take on from working on it. The rough estimates I have gotten say the work to get the upstairs up to code and permitted be $100K, so basically as though I was putting the upstairs room in from scratch.
I am very sentimentally attached to the house since it is my first, and it has a lot of great features that I would not get with new construction—it has a well, a large backyard and established fruit trees where I like to garden, nice location, good energy. I also believe in being a good steward to the house and not letting houses go into disrepair. There are several zombie houses in my general area that could be saved and be homes for people if the owners had taken better care.
The house has increased considerably in equity (likely somewhere between $75–100K), and I have been saving for a remodel, so I could sell my current home (even with the unpermitted work) and get a newer house or recently remodeled house with less problems. My gut is saying it’s a better financial decision to cut my losses and pass along the problems to someone else. Is there any way to make getting the upstairs room up to code a good financial decision, or at least minimize the financial cost to do the remediation?
—In Too Deep?
Dear In Too Deep,
Kudos to you for being an honest homeowner. Many other people in your situation would have tried to pass on the same issue to the next buyer; your desire to make sure it ends with you shows you have integrity. If you are going to sell the house no matter what, and move on, which I think might be the right call given everything you’ve outlined here, I would not worry about doing the work on the stairwell. Instead, I would work to sell the home “as-is” with an experienced realtor. By selling the home as-is, you’ll be disclosing the issue with the unpermitted work and the next owner of the home can willingly make the choice to take on that renovation. Given the house’s other attractions, it seems like you will be able to find somebody who wants to step up.
First, pay for your own pre-sale pre-inspection, and disclose everything. It makes absolutely no sense to be honest about the headache of a stairwell yet lie about a roofing issue or a crappy outlet. You’re selling as-is, so make sure you list everything about your home that you would appreciate someone pointing out to you if you were the buyer again. Besides the honesty, completing a pre-sale inspection allows you to know going into the game what a prospective buyer might use to try to haggle with you.
After your inspection has been completed, get busy. Declutter the house and patch up any holes and scratches left behind from taken-down artwork. Make sure you apply a fresh coat of paint. Have the floors professionally cleaned. Update light fixtures and make sure any caulk in the bathrooms is redone to help combat staining. Highlight all of the fun places in your house and don’t forget to make your garden the star. If you can afford it, spring for a professional stager to ensure your house looks like anyone can live there.
All of the above are suggestions that can help raise your house price higher when it’s time to list it, no matter what work needs to be done. Don’t worry, you’re gonna find someone who loves your home just as much as you do, stairwell be damned.
Dear Pay Dirt,
I’m in my mid-30s, and fortunate enough to have had the help of my parents for most of my education. While they paid for my undergrad and master’s degrees, I insisted on paying for my law degree myself. I attended a state school on a partial scholarship, but still graduated with nearly $200K in debt (all federal loans).
I don’t regret the degree, and I’m a gainfully employed lawyer. That being said, I’ve been on an income-based repayment plan since graduation and have yet to hit repayment of the principal on my loans. And during COVID, I haven’t been paying anything at all. The federal student loan repayment pause has been immensely helpful to me and my family. I live in an extremely high-cost-of-living area, and my husband and I have two small children in day care (which, for two kids, is a second mortgage). I haven’t paid a dime to Uncle Sam in two years. It’s been great. I’m not making Big Law money, and neither is my husband, so the pause on student loan payments has helped us pay off credit card debt and pay for the child care that allows us to work.
My question is this: Was it the right financial choice for me to just ignore my loans for the last two years, and not put any money toward them? If the government wasn’t knocking on my door, I simply didn’t pay. But should I have been prioritizing the payment of those loans over my immediate needs now? With the repayment pause going through at least May, should I now focus the financial wiggle room we have on those loans while they aren’t accruing interest, so they can make a real dent? Or can I keep focusing on my immediate needs like day care, and let my income-based repayment plan drag out the full repayment of those loans?
—I’m Sure You Can Guess What I Hope You’ll Say
Dear Hope You’ll Say,
I suspect hearing from me that you aren’t the only one who didn’t pay loans over the last two years would be very helpful, so for this, I recruited Kat Tretina, a certified student loan counselor and finance writer to weigh in.
“First, be kind to yourself. The student loan relief measures were intended to help people make ends meet during an unprecedented crisis. If you needed to use the money that would have gone to student loans to pay your bills, that’s okay—that’s what it was meant to do,” Tretina says. She added that your next move should be made based on your current financial position. If you’re able to pay your bills, and have an emergency fund, use the rest of the payment pause to take advantage of paying down your student loans while they are acquiring no additional interest.
As for whether it makes sense to stay on an IDR plan? “For many people, staying on an IDR plan and paying just the minimum until the loans are discharged makes sense (federal loans repaid under an IDR plan are eligible for loan forgiveness if there’s still a balance after 20 or 25 years of making payments),” Tretina says. “But if you find yourself stressed out about your debt and hate having that weight hanging over you, paying them down may give you more peace of mind.”
And so, for this one, there is no wrong or right answer. For now, start by making the payments on the student loans, if you have the emergency fund and your bills handled, and then in six months, see where you feel you are financially. You may find you have extra cash to throw at the loan but would rather put that toward your child care instead. Good luck, and don’t forget to be nice to yourself.
More Advice From Slate
I recently reconnected with a cousin who I hadn’t seen in about 15 years at a family wedding. He’s in his early 20s, I’m in my early 30s. (We’re both men.) When we were kids he looked up to me, and I would hang out with him often, because he had a hard time at home. When we saw each other, I honestly didn’t recognize him. He’s become quite a good-looking man, and I have to admit I was checking him out before I realized he was my cousin. My now-strapping cousin immediately glommed on to me at the wedding and told me how much he appreciated the time we spent together as a kid. Toward the end of the night, he said he was questioning his sexuality and asked if he could come home with me to “talk about it.” He was very drunk, and I told him to go to bed. The next morning, he started texting me and asking to have a drink and talk more. I want to support him, but if I’m honest I am attracted to him, and I think he is to me, and it feels wrong especially because he’s my cousin and I basically babysat him as a kid. Should I be there for him and set clear boundaries?