Mother-In-Law Suite Requires Planning

Written by Posted On Tuesday, 26 June 2018 12:08

Question: We have lived in our house for almost 20 years, and are considering selling our large home to our son and his wife. We would add approximately 1,000 square feet to the home, and move into that portion of the house. Our children are amenable.

We would finance the construction because the equity in our present home would be more than enough to cover the cost.

What is the best way to proceed in order to protect everyone's interest? We assume that a written agreement is needed, but what should be included in that document?

Answer: You are wise to be thinking about entering into an agreement with our son and his wife. Even in the best of families, problems and difficulties arise, and it is always best to draw up a written agreement now while you are still talking to each other.

Your question must be answered in two parts: the tax issues and the partnership issues.

First let's look at the tax issue. Fortunately, the new tax law recently enacted in Congress did not change the old law on capital gains. Since you have lived in the house for a number of years and used it as a principal residence, if you file a joint tax return, you will not have to pay any capital gains tax on the first $500,000 of profit. Keep in mind, however, that if before May 6,1997, you "rolled over" profit from the sale of another house to purchase your present home, the profit you then deferred must be considered in your determination of "profit." This can potentially lower your tax basis and you may have to pay some tax. If you fall into this category, please consult an accountant before you take any action to sell.

You have indicated you would be financing the construction of the addition. What tax bracket will you be in and are there advantages to having your son and his wife pay the financing so that they can take the interest deductions?

For example, you could lend your son the money and he would pay you interest, just as if you were a bank. While this interest would be income to you, under current tax laws, if your son and his wife gave you a recorded deed of trust, it would be deductible by your son in whatever tax bracket he may be in. However, under this approach, you may not obtain sufficient moneys to do the construction.

You may also want to consider giving a monetary gift to your son and his wife, and they could then construct the addition using these proceeds. But talk with your accountant if you plan to gift the house to your son; that could trigger a large capital gain for your son.

The tax consequences should be explored, before you make the determination of how to proceed.

The partnership becomes more difficult. There are many questions that should be asked and answered before you proceed with the construction.

What happens if you and your wife cannot live in your son's home? Who owns the addition? Will there be any rent charged you for living in the addition, and if so, how much? Who will pay any increase in utility costs and real estate taxes created by this new addition? What happens if you decide to move out?

Additionally, do you have any other children? And are you properly protecting their interests after your death? While this issue is one we all want to "put under the rug," it is a serious question that must be resolved now.

The last thing you want is for your other children fighting and bickering over the ownership of that addition. It must be kept in mind that you have taken perhaps your largest asset -- i.e., your house -- and have in effect given it to your son. While this may be your intention, there is an old expression that "when there is a will, there are relatives."

Lawyers are often accused of being too pessimistic. I see my role as attempting to highlight some of the possible "horrible hypotheticals" that can -- and do -- often come up.

We all hope that relations between parent and child will be smooth. However, this is not always the case, and you are smart enough to be worrying about these matters at this early point in time.

Discuss these matters with your attorney and suggest that your son and daughter-in-law retain their own counsel to resolve these matters.

In my opinion, an ounce of preventive law is cheaper than a pound of cure.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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