Here’s my first question!! Yipee. I actually have several that have been sent and I will get to them all! Please keep them coming!

My husband and I currently live with my 87-year-old mother-in-law in a paid-for home. Because she’s had some mild strokes and the home currently resides on 5 acres, we’ve decided to sell it. For one, it’s too much work and too expensive for upkeep. Also, we need to be closer to her during the day (hubby and I work about an hour away in opposite directions). And then there’s the possibility of her becoming very ill or incapacitated and she wanted to gift the house/property to my husband so that it is out of her name.

Ok… we’ve got a contract on the house (through a realtor) for $190,000. In turn, hubby and I have a contract on a house closer to my work for $190,000. After the realtor costs, etc. the sale will net $175k. Once all the dust settles on our purchase, it will be about $196k. Hubby and I are putting $150k down and taking mortgage at 5.75% for 15 years for $50,000. That will leave approx $4,000 from the purchase, plus the $25k left in the bank… $29k. We’ll pay off $13,000 debt, put $10k into an emergency fund and use the other $6k for upgrading the house to be usable for my mother-in-law. After all is said and done we’ll be in debt for the home and one vehicle ($18,000 at 3.99%)

So, is this smart? I mean not using all of the sale money for the purchase? I understand the whole interest thing… but hate to not have some kind of emergency fund. I NEVER want to go into debt again after this and hope that having that emergency fund will help us to keep from having to do so.

Thanks for your question! Before I get to your exact question I want to take a minute to explore some other potential issues that could impact what you actually “take home” from this sale.

When is the actual “gifting” taking place? You need to be concerned with tax consequences. If she has lived in the home for at least two years and she sells the house, then there should be no capital gains. Then if you take the money and buy the next house, you will need to have her name on the deed. The reason is, otherwise Uncle Sam will look at that 175K as a GIFT. He’ll know it’s a gift when you explain to the mortgage company where you came up with the money. And you will pay gift taxes on 165K of it. Ouch.

Also, are there other heirs to her estate? Even if they aren’t apparent, to be safe, you should consult a lawyer and make sure that when she dies the house transfers to YOU and not her ESTATE. Truthfully, I’m not sure how you would do this but I’m sure it can be handled via a TRUST or perhaps in her will. You don’t want to be forced into selling the house to pay off the estate. This is outside my area of expertise, but it is well worth you paying a couple hundred bucks to a real estate attorney with an estate attorney in the office to make sure you have covered all the bases.

As far as how you are planning on using the money, it sounds like a good plan. Having an emergency fund is the single biggest step that a family can do to stay out of debt. You should have enough for at least 3 months. The more you have, the more options you have. I’d probably put that money in a short term bond fund or if I was fairly certain that the 6K I was going to use for home repairs was going to “float” over the next year, I’d put it in IBONDS. I bonds are issued by the government, can be cashed at any bank and provide inflation indexed return. The only catch is that you need to hold them at least a year. There is a slight penalty (loss of 3 months of interest) if you cash them in before 5 years, but it’s worth the risk because the return is much better then a money market. And, I personally have found that I tend to “save” these better then I do in a money market account. Or maybe I should say I tend to not spend these as easily as I do from a money market account. Determining “what constitutes and emergency” is another whole topic of conversation. And for me personally, I have found bonds offer me better chances of retaining my savings. You can learn all about I bonds here and you can buy them online!

Good luck on your new home! Sounds like a great plan!!

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