Buying parent's house

[Chonder]

My mom and dad are still self-sufficient, but wont be forever. Dads starting to have a harder time keeping the homeplace up. My wife and I were thinking of offering to buy their home while they still live there.
In other words, we would send them money for the next few years until we FIRE, then pay off the balance. This would give them some extra retirement income, and allow us to pay ahead on a retirement home. They would move onto a nearby piece of land where we could help them as needed. Mother is aware of the idea, and is in favor of it. I expect to FIRE in ~5 years, so they would live there until then.
I'm sure there is a strategic way to do this, but this is a bit unorthodox. Would I pay them interest since they are still living there? Should they charge less than market value since they still live there? Tax strategies?
Any ideas on how to go about this?

 

[kcowan]

If they sell to you and do not repurchase they are exposed to capitals gains taxes. I assume the nearby piece of land will have a more modest home built on it to suit them.

Why not build the new home for them and then swap when it is finished. They protect most of their capital in the new home and have the excess capital from the sale of their larger older home to live on. There are a number of ways this can be packaged and it is probably worth the services of a tax accountant to do it right.

 

[Chonder]

Thanks, this is the kind of ideas I'm looking for. Mom had thought of getting a nice smaller modular home and putting it on the same property (there are several acres). Or putting it on a separate piece of land she owns just a half-mile away. I could send them money for the next five years, then buy them a modular home with the balance remaining and set it up for them.
Does anyone know if they can "give" me part of the property to lessen the potential taxes?
Or, does anyone have a suggestion for how to set this up so that the deal is protected in case of death? Land Contract? It is a confusing situation to me. I have trouble getting the idea of them as the Lender, me as Buyer, them as Renter...and keeping what is fair to each straight.

 

[calmloki]

OK - let me divulge the depth of my ignorance so better souls can correct the errors:

Good ol' Mom & Dad's home should avoid capital gains tax as long as the profit is below $250,000 (?).

Any sale price to a relative needs to be at least fair market value, or taxes will be charged based on that value, however, see above. As a buyer you will want the price to be high so when you sell your taxable profit is less, though if it's for your home , see above.

Interest charged must be at fair market or the IRS will impute that fair percentage rate when looking at M&D's interest income.

M&D can each give a child $10,000 taxfree each year. So maybe if their home is worth $100,000 they could give you $20,000 as downpayment.

Another thought is for them to sell to you while retaining a "life interest", which could be problematic in case they (praise Allah) live into their 100s.

Now. Wiser heads, correct at will!

 

[FIRE'd@51]

If they sell to you and do not repurchase they are exposed to capitals gains taxes.

This was changed 10 years ago. There is no longer any tax break for repurchasing nor penalty for not repurchasing. For a married couple, there are no taxes on the first $500,000 of profit on the sale of a home.

 

[OAG]

Fire'd@51 got it right. No CG at 500K as long as they lived there as home for the required period which no doubt they have met.

Sounds like a win, win for M&D as long as they are very attuned to the deal. No possibility you would evict them early?

 

[Chonder]

Heck, the place is large enough, we could all live there if need be. We plan to move no earlier than 4 years...that's when I am fully vested in my RMA. My 11year younger DW may begin looking for a j*b there as early as then, and we'd play it by ear from there. No more than 5 years though. Her finding a j*b isn't necessary, but would probably save me alot of headaches!
I'm just trying to get an idea of all the factors to discuss with them. How would you do it in my situation?

 

[OAG]

Exactly the way you have it planned, and assuming EVERYONE would be happy with the plan. Seems like everyone is, except maybe Dad, you will know better when he signs up.

 

[Chonder]

We vacationed there the past two weeks. Such solitude...most people would be bored. We walked, swam, talked, tv'd, saw elk, ate garden food, and talked about buying the family homeplace.
Prior to talking it over, my dad happened to mention what he would expect for the place...and it was reasonable. My wife and I held off talking until the last day so we could think over whether she/we could live in such an out of the way place.
All of the basics are within ~30 minutes, but the nearest town with a mall is ~2 hours away.

Anyway, we decided that we'd like to buy it. My mom was excited by the terms and thinks its a really smart idea.
My dad can't quite grasp HOW I could possibly be FI in only 5 years...and can't quite grasp how my (decade younger) wife would keep working after I RE to become Mr. Mom...and can't quite grasp the idea of Us buying his home while he still lives in it. Mom will explain it to him.

The verbal terms so far:
We pay X dollars/month for ~5 years
Pay remaining lump sum at end of 5 years, or continue payments if he prefers
Dad lives there/keeps deed til balance is paid in full OR we take possession
We pay NO interest, fixed price.
They make NO major changes to the property without consultation.
They pick the lawyer, I pay to draw up the contract.

Sounds fair to me. Any holes?

 

[calmloki]

"We pay NO interest, fixed price.
They make NO major changes to the property without consultation.
They pick the lawyer, I pay to draw up the contract".

Still think there's a gotcha on charging no interest IRS-wise for either you or the parents - i think seller/parents. Might save some grief if someone who knows tax law could weigh in on that

 

[Rustic23]

What are the property taxes in Mon and Dad's state. In Texas they qualify for several property tax deferments and discounts if they are over 65. Are there similar things in their state?

 

[Chonder]

Hmmm

I don't know the specifics, but annual property taxes where they are is less than $1000/year, so it's not a big consideration.
Once we agree verbally, we will consult a lawyer for the finetuning.

A friend of mine today made a good suggestion. He said I should ask mother to mention my offer to my siblings and give them the chance to "outbid me" (highly unlikely) just so that they later wont be able to suggest that anything shady went on. I would be okay with this. So far, my siblings are only aware that I plan to move somewhere near there when I FIRE.

 

[Martha]

Be sure to talk to the lawyer about the imputed interest issue. You may be able to structure the deal to minimize or eliminate the issue.

 

[BUM]

Hi Chonder,

Good ideas above. Here is what DW and I have done since RE in '05. We travelled a bit but always had issues leaving our house for extended periods. We moved daughter and SIL in. They can buy the house if they want to. While they are thinking about it, they pay all the bills. DW and I share the expenses only while we are in residence which is a few months per year. I had to do some remodeling but essentially DW and I get the basement, the kids get the top floor and the main floor is considered common area. This all works because we all get along just fine and we aren't there all that often.

You can think of a million CONS but the PROS all start with ONE:
1 house
1 utility bill
1 tax bill
1 family

Hope this helps.

 

[Chonder]

Thanks for the ideas. Before I talk to the lawyer I like to have a list of questions to ask him in case he overlooks something, and you all have mentioned important aspects.

 

[Chonder]

Update

We are drawing up a contract and now have ~4 years, 8 months to RE for me. It is fun having a specific dream and direction to focus on. Lots to plan and do in the meantime...it will go by fast.

 

[Caroline]

I may have missed it somewhere, but I'm assuming you have no siblings or other interested parties?

 

[Chonder]

I do have siblings, but none are interested...they all have homes of their own nearby. I am the only one out of state, and this would put me back in touch with them. They are glad for me to maintain the homeplace and keep it a central family meeting place.
I think it will work out fine.
Did you have a specific concern with regard to siblings?

 

[Caroline]

no specific concerns about siblings, just my strategic planning brain at work anticipating possible issues down the road.

My parents made me executor when they finally shuffle off -- I'm the logical choice for a lot of reasons but when i told siblings (which my parents had not bothered to do) there were eyebrows raised.

If your sibs are aware and on board, no worries!