#539: Ask Paula: Escaping a $100K Tax Nightmare
Saul and his wife want to retire in Mexico but they don’t want to give up the ability to continue investing in US stocks. Can they buy a primary residence that doubles as a short-term rental?
Nina and her partner are eager to start a $500,000 renovation on their home but they’re still three years away from saving enough. How can they bridge the gap without risking too much?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Anonymous asks (at 01:27 minutes): During the last several years, I was involved in a business partnership that went sour and ended with a lawsuit. I worked as a 1099 contractor but never paid estimated taxes because I couldn’t predict how much I’d earn.
Long story short, much of the money I was paid was retracted and I was asked to return a significant portion of it during the legal dispute.
I made $90,000 in the first year, $160,000 in the second, and $360,000 in the third. This translated to a tax bill of $70,000 in federal taxes, $20,000 in state taxes, and $10,000 in city taxes.
I’m in a bind. I don’t have the money to pay it in a lump sum and the balance continues to increase in interest penalties and fees. Where do I go from here? Are there tax abatements I can look into? Do I talk to a tax professional? What do I do?
Saul asks (at 21:43 minutes): My wife and I are 48 and live in Virginia. We plan to retire to our fully paid home in Mexico in five to seven years where we can live comfortably on $4,000 to $5,000 monthly.
If we relinquish our US address we can no longer buy new mutual funds or open new accounts at our brokerage. For this reason, we’d like to sell our properties in Virginia and buy a primary home with cash in a no-income-tax state such as Houston, TX, or Las Vegas, NV.
We don’t plan on living there for more than three months a year. Can we legally use our primary residence as a short-term rental in this situation? Does this vary by state or neighborhood? What’s your advice for us?
Nina asks (at 45:07 minutes): My partner and I love our home and community, but it’s becoming too small for our expanding family. How do we plan for the cost of a $500,000 renovation? Is it even a good idea?
Four years ago, at 29 and 30, we bought a small home in San Francisco with a 10 percent down jumbo loan. We eventually refinanced to a 15 percent down loan with a 3.25 percent fixed interest rate. We’ve just passed the 20 percent down mark.
We have one child and hope to have one more soon. Since it’d cost more for us to buy a larger home in the same neighborhood, we feel that building an addition to add two bedrooms and a bathroom makes the most sense. I’d like to begin the process as soon as possible.
We bought our home for $1.36 million, and it’s appreciated $200,000 in value. We have $150,000 in investments, $60,000 in our emergency fund, and $20,000 in our toddler’s 529 plan. My husband has $200,000 in retirement and I have $180,000.
I make an annual salary of $200,000 with a possible 10 percent bonus, and my husband makes $210,000 with a 50 percent bonus. We’re fortunate to make an amazing living. But, given the high costs of living in our area, most of our savings come from annual bonuses.
We want to save the $500,000 in cash but that’ll take another three or more annual bonus cycles. In the meantime, we plan to take out a Home Equity Line of Credit (HELOC) for emergencies.
Are there any financial programs or loans we should tap into as we begin this addition? Are there any building resources that we don’t know of?
How do we think through this?
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