My parents want to pay off my $200,000 mortgage, and move into my rental. They say I’ll owe my sister $100,000. Is this fair?

My parents propose to use the proceeds from their condo sale to pay off my mortgage, an amount that precisely matches the outstanding balance. The challenge arises as I still carry a mortgage on my condo, initially intending to rent it out to cover the monthly payments. 

Complicating matters, my older sister is entitled to 50% of the money from our parents’ condo sale, given that there are only two children in the family. If they clear my mortgage, how do I determine my sister’s future claim on my condo? 

Assuming the condo sale fetches $400,000, with $200,000 allocated to settle my mortgage, my parents assert that, upon their passing, I must return this amount to my sister. However, I wonder if it’s truly that straightforward, considering the potential inflation of this value over time.

Alternatively, splitting the $400,000 evenly now would allocate $200,000 to my sister and the remaining $200,000 to me. Yet, this falls short of covering my existing mortgage, requiring my parents to cover the balance. I question the fairness of this, especially asking them to handle the monthly mortgage.

I seek your advice on this matter. Thank you.

The Other Sister

Also see: My sister and her ex-husband promised, in their divorce decree, to repay my loan. They never did. Is this legally binding?

Dear Sister,

This is far more complicated than it needs to be. 

Your parents cannot afford to pay off your mortgage if they say they have to give 50% of that $200,000 to your sister as their inheritance. It puts you in a difficult position: You are then beholden to your sister to give her $100,000, a debt I assume you would honor, but this column is full of such arrangements where agreements were made (but not signed) and people reneged on them after their parents passed away.

Another difficulty: If they pay off your mortgage, and your condo increases in value by 50% over the next 10 years — or more years, in the hope that your parents have a healthy and long life — do you repay your sister $150,000 or $100,000? Your sister would not be an investor in your condo, so giving her the $100,000 she would have received initially would seem like a reasonable solution.

I see what’s in it for your parents and, to a lesser extent, for you: They get to live somewhere rent-free, and you get $200,000 upfront. But they’re really only giving you $100,000 and, if you did go ahead with this, your parents would be effectively loaning you the other $100,000. Ask them to keep the proceeds from their condo, as they may require it for emergencies, and rent a condo in an area of their choosing.

But what if there was a property crash and the condo, now worth $400,000, is worth $200,000 at some date in the future? What if there was flood damage and you did not have adequate insurance? And what if your sister cries foul, and says she wants the money tomorrow? What if your parents become frail as they age and need to move to residential care, and their money is wrapped up in your condo?

If your parents did pay off your mortgage, and lived another 20 years, they would be living in a $400,000 condo at a cost of $200,000 to them, and you would receive no rental income over that time. When you rent a house, you can also avail of many tax write-offs, including depreciation, advertising expenses and maintenance and repairs. You won’t be able to claim these, if your parents are living there rent-free.

Seek legal counsel

It bears repeating: Never make such a big financial decision without the help of legal counsel, especially if you are dealing with family members. Gary Botwinick, chair of the wills, trusts & estates, and taxation practice groups at Einhorn Barbarito in Denville, N.J., has sympathy for you — and your parents. “The matter of equalizing children in an estate plan is one of the most challenging issues for a parent, especially where one child has current needs and one or more of the others does not,” he says.

He suggests your parents could pay down half of your mortgage and give your sister her share of the inheritance now. Second, they could give each of you a cash gift, and you could each choose to spend it as you wish. Third, Botwinick says your parents could pay down your mortgage and purchase an interest in your residence, if they had the money, and leave that interest in your residence to your sister at the death of the survivor of the two of you. (That sounds like the least attractive option to me.)

Families — or family systems, as they are sometimes called by psychologists — have a complex set of values and expectations that people may or may not be aware of. People are conditioned to accept certain things and behave in a certain way in families, and if they deviate, sometimes other family members are encouraged to intervene. Do not feel duty bound to accept this arrangement.

If you do decide to decline their offer, and rent to your parents (instead of an independent third party), ask them to sign a rental agreement. It’s good practice. There will be no dispute about who was supposed to pay for what. But would you be willing to increase the rent for your parents if property taxes rose and the rental market improved? For all of the above reasons, it’s better to avoid mixing family and finance.

Maintain your financial independence, and help your parents find another property.

More from Quentin Fottrell:

‘My father, 75, died without a will’: His ex-wife, fiancée and children are hiding his financial documents. What can I do?

I want more time with my newborn son, but my husband doesn’t work. Should I give up my job and dip into my six-figure trust fund?

My husband bought our house with an inheritance. I signed a quitclaim. He said I could live there after he dies, but changed his mind. What now?

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