HELP --Splitting a house with In-Laws, what should i be aware of?

[Mike Xiao]

I am in discussions with my brother and sister in law, to pay off the remaining amount due on my mother in laws home.  The total amount still owed on the house is $230K, and the home is currently worth about $800K, conservatively.  My sister in law would live in the back house rent free, while my mother in law lives in the main house.

We would split the $230K 3 ways, and we would all be equal owners on the house. We would split propety tax, repairs, and utilities 3 ways  

Seems like a no-brainer but I am just weary of getting into any sort of investment with family and in-laws, due to all the nightmares I've heard.

I think I want to create a side contract for potential issues that arise, so there is no argument back and forth. We just turn to the contract

What things do you all anticipate that could possibly come up as a debate, that we should put into such a contract???

[Katie L.]

@Mike Xiao

You have raised a ton of possible issues in your little scenario.  You would do well to hire counsel to go through all the possible landmines with you, and as you mentioned, draft a contract and agreement.  And as others have mentioned, you need to consider the long-term end game as well.  Once your mother-in-law dies, what happens to her 1/3 share?  Are you okay with the sister in law still living there rent-free after that?  What happens if you want your equity out?

Couple other things to consider... 1) gift taxes: this likely would be a gift of the equity of some sort from mother in law to some degree requiring the filing of a gift tax return and reduction in her lifetime exemption.  Another gift issue: are you paying cash to your mother in law who then pays the mortgage and then gifts you property such that it is 2 gifts and also requires you to file a gift tax return?  Are you making a taxable gift each time you do not collect some rent? 2) property taxes: is the property in CA?  This likely would be considered a change in ownership triggering a property tax reassessment and that could amount to big dollars depending on when your mother in law bought the house.  Do you qualify for any exclusions to stop the reassessment? 3) income taxes: if a part-sale, part-gift transaction, does your mother in law have any sales proceeds to report?  If a gift, gifts take a carry-over basis and if that is low, you now would have a low basis in the property.  If you were to sell, could be large capital gains to pay whereas your sister in law might be able to use exclusion for primary residence to avoid capital gains.  Are you better off having your M-I-L hold until death and receive a basis step-up?

More issues... who pays for the expenses?  Who gets the tax deductions?  What happens in the event of disagreements?  How will title be held - any probate issues at someone's death?  What happens to MIL share after her death - does it pass equally or would sister in law have a majority interest then?  What if one person wants their equity out or needs to mortgage their share?  What about more major renovations and costs?  Etc.

Danger ahead, even if you trust and love everyone.  Much better to have it worked out ahead of time.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.