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Lillian Karabaic is headed for new ventures—this is her last column for Pay Dirt. You can continue to follow her money thoughts over on Twitter. Check back each week for new columns from Athena and Elizabeth.
Dear Pay Dirt,
About 10 years ago, my husband and I won a moderate sum in the lottery. We grew up middle class and were honestly a little intimidated by the amount, so we bought a modest house with cash, paid off debts, and put the rest in the stock market with a financial advisor we’ve come to trust. There have been some wild market swings, but it’s settled with about $3 million in the account. We take a small disbursement (less than 1 percent a year), get some dividends, and dip in when we need something big like a home renovation, but otherwise, we leave it alone and day-to-day live off the salary from our jobs.
Big picture, it’s growing faster than we spend it. We enjoy the security of knowing that retirement is set and emergencies aren’t a concern, and since we don’t have debt our salaries provide a pretty comfortable life. We work jobs we like, enjoy our hobbies, do some comfortable-but-not-crazy-luxurious travel, and are generous with friends and family and causes we care about (we don’t have kids). We’re happy, and glad that we are the same people we were pre-money! But I can’t shake the idea that we are doing wealth “wrong.” I see so much (in this column and elsewhere) about passive income, trusts, LLCs, IRAs, CDs, leveraging debt, tax loopholes, etc… and it’s all Greek to me. A life of endlessly striving for more when I have enough doesn’t appeal to me, but I can’t shake the feeling that I’m naïve and that this all should be more complicated. What am I missing?
—Doing Wealth Wrong
Dear Doing Wealth,
You are literally doing wealth exactly right. Don’t overcomplicate things. You’re doing great. If I can, let me recommend an unusual book to take away lessons about wealth. The Last Guru, a Daniel Pinkwater novel aimed at geeky young adults, follows the unexpected spiritual growth of the accidental richest kid in the world.
Dear Pay Dirt,
My husband’s mom “Amanda” raised her three kids by herself and has always lived just above the poverty line. My husband, “Max” and his siblings are all married homeowners with fairly stable lives, so we’ve started to talk amongst ourselves about supporting Amanda as she ages. At the moment, she makes just enough money to pay her bills but isn’t actively able to save. We’re assuming with the way rent is increasing everywhere, that we’re going to end up subsidizing her housing one way or the other, so we’re thinking of going in on a house together for her. This seems common enough, but I’m wondering if you have any insight on how it actually works for a group of six people to invest in a house and become a landlord essentially to the seventh? Especially considering that the tenant may have to stop working in the next 10 years or so.
All six of us kids get along pretty well and there aren’t any major red flags that immediately make me think we shouldn’t try this. A few wrinkles in the plan are that two of her kids live nearby and could help with move-in and maintenance, but Max and I are pretty far away. I feel like I’m the most legal and real estate savvy person in the group due to the nature of my job, but I’m not sure how to balance the organizational labor I’d be willing to do with the physical labor they would need to do. Additionally, Max and I have already gifted Amanda more than $6,000 in the last two years for emergencies. We obviously wouldn’t consider that an actual investment in the house that would result in a return after its sale—but we would like to formalize the idea of them each shouldering expenses for her until we’re all somewhat even.
—Family Biz
Dear Family Biz,
The legal structure you’re likely looking for is a partnership or a multi-member LLC. Such an entity would allow you all to contribute varying amounts to the purchase and maintenance of the home as appropriate to each couple’s circumstances. Any past expenses or sweaty equity can be hammered out in the partnership documents for the LLC. (But I would warn against bringing up your one-time gifts to Amanda unless all parties agreed upon them at the time; it might otherwise muddy the waters). However, having a partnership or multi-member LLC comes with a tax and paperwork burden you might not be prepared for. You’ll have to file annual schedule K-1s and send them to every owner for use on their personal taxes, file property taxes in two locations, ensure meticulous accounting of every expense for the property, and spend time pouring over depreciation tables (or hire a CPA to do so).
The big caveat is that many investment advantages of being a rental property owner may disappear when renting to family. Each of you may be forced to claim the rent you receive from Amanda as income but be disallowed deductions for maintenance and care of the property. So that means all the costs of another home but with none of the advantages of a rental. IRS Publication 527 clarifies that rentals to immediate family members are generally considered personal use and not renting “for profit.” There are sometimes ways to navigate around this, but if you stop charging Amanda fair market rent when she stops working, the property will almost definitely fall under personal use.
Before pursuing this, you should check if Amanda is even interested. Having her children and their spouses all be her collective landlord might not be her ideal scenario. This kind of situation often leads to resentment and tough feelings in the family. It might make more sense to help her with rent as she grows older (especially if she qualifies for subsidized senior housing). If she’s renting from family, she might not qualify for certain types of aid as an older senior. And if she needs to move into supportive housing (eventually, far down the line), she might feel “stuck” in the home even when it no longer fits her needs. Owning a home between six people and renting to the seventh is certainly doable, but it might not be a slam-dunk decision.
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Dear Pay Dirt,
What is the most ethical and least cruel way to divorce a woman who has been out of the workforce for 18 years to raise our special needs son (he is nonverbal with cerebral palsy and uses a wheelchair)? I care deeply for my wife but we’re more like roommates than husband and wife. I’m afraid if I divorce her, she will have a hard time getting back on her feet. What do you suggest? I’m considering staying married on paper to take care of her and our son and moving out of the marital home, but I know this can have implications for marital abandonment in the long term. She has access to our joint savings and checking accounts. I would like to open a separate account for myself and continue making “payments” into our joint account for her to use.
—Amicable Divorce
Dear Amicable Divorce,
The least cruel way to divorce your wife is to talk to her (and maybe a relationship counselor) about your marriage rather than an anonymous advice columnist. It’s admirable that you’re trying to plan this out considering her, but plotting out your approach before talking to her is more likely to make her feel blindsided than cared for. Having a marriage counseling conversation will also allow her to think about her needs before seeking representation in divorce court.
It’s great that you’re trying to approach it in a way that minimizes harm to your wife and son. But she will need her own advocate to represent her interests—a divorce lawyer or a mediator who only represents her. This way, she can fight for a fair share of the assets, support for your son, and alimony. Even if you end up in an amicable “collaborative divorce,” you still need lawyers to negotiate a mutually agreeable settlement.
Any reasonable judge will consider your wife’s needs in a divorce, especially since she has been out of the workforce for 18 years with a disabled son. A fair settlement will consider your joint savings and your wife and son’s ongoing financial needs. You’ll likely be required to continue contributing to certain expenses, such as your son’s medical care. Regardless of the legal logistics, this conversation starts with your wife. The least cruel divorce is one that doesn’t come out of the blue.
Dear Pay Dirt,
My husband and I bought our first home back at the beginning of 2020 just before COVID shut everything down. We bought under our budget and refinanced during the market’s low so our interest rate is something like 2.7 percent.
However, my husband is transitioning into a new job soon and this will move us and our kids to a new state on the other side of the country. We have no intention of ever moving back to the state we own our home in (we have no family here and have had our fill of snow). My brother owns three homes and rents out two of them. He keeps advising us to rent our home out because it would cover the mortgage and we would gain equity as time goes on. I should mention that my husband qualifies for the VA home loan, so we don’t technically need to sell this house in order to purchase one in another state since it’s zero down, but if we had something to put down it would increase the budget of homes we could be looking at. Also, where we live currently gets A LOT of snow, and that means there are random home maintenance issues that we don’t want to be saddled with paying for.
We’ve known we would eventually outgrow this home as our family grows. Because of that, we have been very intentional in our few years here to update and make improvements. We’ve redone all the bathrooms, updated all the light fixtures, added canned lighting, leveled out the backyard, planted trees, etc. It’s been a labor of love that I would love to see some return on rather than see it ruined by renters when we are too far away to really be involved in making sure it’s taken care of. We’ve met with a realtor to get an idea of what we could even list our house for, and it’s about $70,000 more than we bought it for which is great considering it’s smaller, square footage-wise. I guess I’m looking for some reassurance that selling is the best option here. What hangs me up is our interest rate, along with where the economy seems to be heading.
—To Sell Or Not to Sell
Dear To Sell,
Here is your letter distilled in a pro-con list for renting out the house, with a few extras I’ve taken the liberty of adding below:
Cons:
—Location requires extra seasonal maintenance
—Being a long-distance landlord
—No plans to move back
—Having to do taxes in multiple states
—Renters will likely be harder on your property upgrades
—Ties up your liquidity needed for a down payment in a new location
—Lose out on capital gains exclusion after it is no longer your primary residence
Pros:
—Low-interest rate
—Brother thinks you should
When you lay it out in a list, it’s clear. Sell the house. There’s no reason to become a long-distance landlord simply to hold onto an interest rate. Don’t bow to peer pressure.
—Lillian
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My husband and I have been married for 15 years, and we have two elementary-age kids. A few months ago, I discovered, by accident, that my spouse had long been out of work and had hidden this from me (including lying when I asked specific questions). He had secretly opened multiple credit cards (bills only came to his email) and incurred over $100,000 in debt. It’s unclear where the money went.
