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Buying a Home for Parents

2,027 Views | 13 Replies | Last: 4 yr ago by Absolute
Ogre09
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AG
Needing some advice. Parents are reaching retirement age (currently 62) and aren't in great health, but aren't in a great position financially to retire. My wife and I are considering purchasing a home near us for them to live in, but have some questions around the best way to do it, and see if there's anything else I need to be considering.

They currently own their home outright, far away from their kids and grandkids. I was thinking it might be good if they could sell that house, invest the return, and draw on the gains from that investment.

I plan to talk to a mortgage lender soon about this also. Anyone else I should be reaching out to (tax professional)?

Should I take out a mortgage for the second house, or refinance my existing house and pay cash?
I am 9 years into a 15 year note on my existing house, and prices have increased significantly in my market. I owe $85k and the my guess at market value is $250-280k. I have around $40k in cash on top of that. I'm looking at $180k-$200k for the second house. I think the interest rate would be higher on a second house. Refinancing my existing one would start the clock over, but I would be paying a mortgage for 15 more years either way and I'll still be working past that anyway. I guess I need to run the numbers on how each option would affect my cash flow. Any other factors to consider?

Should I charge them some rent for staying in the house, or let them stay for free?
They could probably afford to pay something, but less than market value. Paying something would probably be easier on their pride. I'm pretty ignorant on the implications of each option apart from that.

Capital Gains Tax
I don't think this would be an issue until decades from now, but anything to factor in here for now?

Cash Gifts
This could possibly come into play, either if we use a portion of the proceed of their home to help purchase this new home with cash (them to us), or if we end up giving them some cash to help them buy the new house themselves. Does the $15k annual limit apply to each individual? Could one couple give another couple up to $60k?
EagleCamden
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I think you should have them pay enough to cover the taxes on the property. They should also pay utilities.
dubi
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EagleCamden said:

I think you should have them pay enough to cover the taxes on the property. They should also pay utilities and insurance.
one MEEN Ag
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Thats awesome that you're thinking of your parents here, and this is going to sound callous, but I would caution you to not bend over backwards for them. They should incur some costs and sacrifice as you are sacrificing a lot for this gift. Gifts can turn sour really quick especially for things like this. They had 61 years to get their finances in order, no need to give them an absolute free ride here.

Just some questions to ask yourself:
  • Why can't they sell their house and buy closer to grandkids on their own? What are their immediate needs in a home? Does it have to be a home? What are their dreams for retirement?
  • If they don't have enough money to sell their house, cash out and buy closer- how much lifestyle are you willing to underwrite? If you contribute a 1,000 a month to the mortgage to get the numbers to work, can you do that forever? how much is that impacting your own retirement? How does that money change your lifestyle and are you okay with that?
If you've got all the family string answers covered and just want straight recommendations here's mine:
  • They sell their house (if in Texas I would highly recommend using Red Pear Realty, they can save so much money here)
  • You buy a rental home (same deal, Red Pear Realty) and pay the down payment yourself.
  • Your parents become your tenants and y'all strike a formal tenant agreement. They can pay under market if you want, but it needs to be a real lease and it needs to have a rental amount (could be $1 a month). I would suggest something close to real market rates if you're fronting the down payment. At least insurance and taxes.
  • They cover utilities.

End result is your parents get a place to live, you get to help them out with a one time gift, they cash out their home equity and invest it into the market, you get to see appreciation on your asset, and you can sell it all years on down the road as the situation changes. This doesn't cloud inheritances either.

When it comes time for medicare/medicaid/ss/ssid it'll be good to already have that asset out of their name. The government can look 5 years back when assessing assets. If your parents rack up huge medical bills in their old age the government will have rights equal to their costs in your parents estate whenever they pass.

Best of luck, you're doing something good here. I've seen these situations go bad very quickly. Gifts work best when they are one time things. I've seen a relationships go south over a 'gift' of a monthly car payment that suddenly turned into 'I'm not paying if I'm mad at you.'


cab559
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I'll be honest. It appears you are doing ok financially, so would avoid any situation that would potentially jeopardize your financial future or that of your children's.
Ogre09
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dubi said:

EagleCamden said:

I think you should have them pay enough to cover the taxes on the property. They should also pay utilities and insurance.



Thanks. That sounds like a good baseline.
Ogre09
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Thanks for the reply. Definitely potential for things to go wrong relationally and financially if done incorrectly. The one-time gift aspect has me wondering if giving them cash to cover any gap between the proceeds of their current home and the purchase of a new one might not be a better idea.
one MEEN Ag
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Ogre09 said:

Thanks for the reply. Definitely potential for things to go wrong relationally and financially if done incorrectly. The one-time gift aspect has me wondering if giving them cash to cover any gap between the proceeds of their current home and the purchase of a new one might not be a better idea.
That could be a good gift idea. I know I plugged red pear realty, but they can really save you some money. 2% back of his commission when buying and flat fee listing when selling. If they buy a home worth 200k, he saves them 4k right off the bat.

Red Pear Realty
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AG
one MEEN Ag said:

Ogre09 said:

Thanks for the reply. Definitely potential for things to go wrong relationally and financially if done incorrectly. The one-time gift aspect has me wondering if giving them cash to cover any gap between the proceeds of their current home and the purchase of a new one might not be a better idea.
That could be a good gift idea. I know I plugged red pear realty, but they can really save you some money. 2% back of his commission when buying and flat fee listing when selling. If they buy a home worth 200k, he saves them 4k right off the bat.




I really appreciate the recommendation! We'd love to help y'all buy and sell. Happy to discuss, link to my website is below.
Sponsor Message: We Split Commissions. Full Service Agents in Austin, Bryan-College Station, Dallas-Fort Worth, Houston and San Antonio. Red Pear Realty
littlebitofhifi
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We've looked into a lot of different parent/child options when it comes to real estate and seem to always come back to the gift (under the limit) option as the cleanest.

In 2020 the $15k limit is per person per recipient. So, yes, one couple can gift another couple $60k/year and stay under any tax liability for the recipient. That's the route I'd take.
dudeabides
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In addition to great advice above, I would suggest that you consult with someone who is well versed in Elder Law and Estate Planning should you get serious about the idea of your parents selling their current home and moving into a house that you would own.

Your statements about your parents not being in 'great health' or 'financial position' leads to me to believe that your parents may ultimately need financial assistance from Medicaid to pay for nursing care (many years down the road). Before Medicaid will begin to pay for such service, your parent's estate must be spent down to certain levels. However, the one major asset they will let your parents keep is their home. So, in terms of estate planning, it makes sense for them to own a house at this point in their life, as it is one thing that Medicaid will not touch (assuming it not expensive palatial estate). Nursing care may be many years away, but it's important to think about it now.




Absolute
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It is good that you are trying to plan ahead on this.

About 8, maybe 10, years ago we were put in a situation where my mil lost her house (due to stupid choices) and needed a place to live. The three siblings that live in the same town were not in a position(and still are not) to help. Figuring it was a better option than her renting and moving around every year we bought a small builder foreclosure house for her. The original agreement was she would pay rent (pay something, if not market rent, at least cover the mortgage and a little more.). I came to find out that the irs states that you must be charging fair market rent value, she wasn't paying that. So we switched it to not a rental but a second home (yes a stretch as well, but at least we were not claiming a business loss.). Fast forward a few years and she decided she wanted to retire and basically do nothing (she collect ss from the fil's ss after their divorce 30 years ago because he doesn't need it.) It apparently caused her no stress to just stop sending us the agreed upon money. No discussion, no explanation, no apology, nada. So now and for the last 5 or 6 years we pay mortgage, insurance, taxes, hoa, all utilities and upkeep. It is a freaking lodestone. Believe it or not, it is a no go and unacceptable choice to kick out a parent even when they do the above to you. It has a huge negative affect on the relationships!

We are not rich. This burden is noticeable and pisses both of us off when we think about it too much. We can manage the expense, but it definitely negatively affects things we could do with the money that would be better for us and our kids.

Maybe we will be made whole (I sincerely doubt it) when she passes and we can sell the property. Edit: Thought this through more and laughed. We won't even come close.

My point in sharing is to reinforce your planning and ideas of speaki g with experts to make the best plan. Seems like you/they may be in slightly better place. Figure out what makes the most sense regarding their equity. But be aware that dealing with family can suck and turn south quickly and your options are very different than they would be with non family.

Good luck!
Deats99
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Ogre09
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Thanks for sharing your experience.

Do you have to count the rental payments you receive as income for you? Any other tax considerations there (deduct expenses)? Did you originally claim the house as a rental property before you ran into the "fair market value rent" issue? Does the rent reduction you give them (fair value minus actual) have to be reported if you consider the house as personal use?
Absolute
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I am far far from a tax or business rule expert, so take my thoughts with that in mind and verify on your own.

If you set things up as a rental, you would treat everything as a business. So, yes, the rent would be income and expenses related to the house would be just that and would reduce the income.

If not setting it up as a rental, I believe that your parents could legally give you money under the allowable family gifting rules. Each of them could give you and your spouse up to the limit each without it having to be counted as income. Again, though, I do not know if there is some rule against that or it happening long term.

Another consideration is property tax. You cant homestead it, so the tax will be higher. There are trust things out there where you could own it but the trust let's it be considered legally theirs regarding tax and such.

I imagine these are things an estate planner, financial adviser legal type could help guide you on. I would seek advice from someone like that then encourage some open detailed discussions with your parents on the specifics and getting everyone's expectations and agreements lined out.

Not at all suggesting that you don't help or do what you are thinking, I would like to think that my situation would be that exception, not the rule.
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