Q. I am one of five siblings, and we are all older than 50. Four of us are married and have families, while one brother who is single lives with Mom. My mom is a widow, 82 years old, and she owns her home, but over the years it has come into disrepair. It has been tuck-pointed and reroofed, and we put in a new garage, furnace and A/C, but the interior needs upgrading. The original electric and water need to be replaced, as well as remodeled kitchen and baths.
She doesn't want us to do anything to the house and just wants us to sell it when she is gone. I would like to present a way to upgrade and modernize the house utilizing its equity, to give mom a safe and comfortable living space and at the same time increase the value of the home.
I also need to convince my siblings that it would not be a burden financially to accomplish this. Where would I start?
My brothers and sister would be willing to listen to a plan that can be presented to my mom. How can we borrow against the home to get the repairs done and possibly repay interest only if principal becomes an issue? I was thinking at least $40,000 to $50,000 would be required. The home is free and clear and worth about $175,000.
A. You didn't tell me the most important thing -- why doesn't your mother want to make these improvements? Many seniors dread upheaval and fuss, and would much prefer getting along the way they've been doing. I've heard homeowners a lot younger than your mother say that just redoing a kitchen was an enormous amount of stress. I'd hate to think you five might gang up on your mother with some plan you got from this column.
But if it's simply that she can't afford to do what she'd like, this sounds like a perfect situation for a reverse mortgage. At your mother's advanced age and with a house worth $175,000, she would have no trouble borrowing a lot more than $50,000. As with any mortgage, she'd still pay property taxes and insurance premiums. But she wouldn't make any monthly mortgage payments. Her closing costs and every month's interest would be added to the $50,000 borrowed, building debt against the property. It would need to be paid off only when she moves out or dies and the home is sold.
There's always a limit on how much your family could expect to recoup in a higher sale price some day. A real estate broker can help you estimate what it would be prudent to invest in the house, taking into account top values in your mother's neighborhood.
And of course with that reverse mortgage to be paid off, you'd end up inheriting less some day.
Q. I don't understand why you insist on referring your readers to their own "CPA" regarding tax matters. You are doing your readers a tremendous disservice by using the CPA designation as a generic term for tax professional. Enrolled agents, or EAs, possess the only professional designation that indicates the person has demonstrated competence specifically in the area of taxation. At the least you should refer to "your own tax professional" as opposed to "your own CPA." For more about EAs, please visit www.naea.org.
A. You're right, of course, and I'll try to remember in the future.
Q. In your column, you had a question concerning the cost basis of property acquired by gift. As a general rule, the donee of the gift takes the donor's basis in the property. If there is a lot of appreciation in the property, it can be a bad idea for elderly parents to give the property to their child or children while still living. If the children acquire the property by inheritance, then the children get a basis equal to fair market value on the date of death.
A. Many thanks for your explanation of the rules. Yes, the children might later regret that they took over the parent's cost basis with the gift, when if they'd waited they would have had a higher cost basis upon inheriting the property.
One exception, as I understand it, is possible if the parent remained in the property, treating it as his or her own.
"You'd ask who's been paying the taxes -- what's the address on the death certificate?" one lawyer told me. An heir might claim there was no real transfer, and that the property was actually inherited, thus getting the higher stepped-up cost basis.
Whether that was worth doing might get complicated, involving a comparison of estate and capital gains taxes. You'll notice I almost always recommend consulting a lawyer.
• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.
© 2014, Creators Syndicate Inc.