Buying your parents home taxes, gifts, step up?

[Luck_Club]

Hi the situation is my wife and I are discussing buying her parents home with her two siblings to make it easier on her parents. The parents still have a mortgage and work 9 days a week between them @ 73 tears old. We are estimating the debt is somewhere between $100K-$150K, and the town assess the property at $240K.

The general thought is my wife and her two siblings would put up the money to retire the debt leaving the parents with only taxes, utilities and insurance. Then they wouldn't need to work so much or worry so much. They are spenders, so they may not slow down the work schedule, but increase their spending.

What are the possible downsides to this plan and how would you structure it so the money invested, which may not be equal, and the heirs are treated fairly, when the parents either pass or move to some other housing arrangement?

 

[Sunset]

The parents could lose the house by one becoming sick and medicare takes the house.

Best solution would be to buy the house outright and let them live there. Have a written agreement on the % paid by each party and agreement to sell it once they are no longer needing it (dead, etc).

 

[OldShooter]

The best solution is to talk to an elder law attorney or a trusts & estate attorney who knows your state's laws. This is not the type of question that will elicit reliable advice from the internet. Come to think of it, I'm not sure that there are any questions that will elicit reliable advice from the intenet. But it's great fun, of course.

 

[Happyras]

One option might be a LLC partnership providing equity shares to each heir and your inlaws. I know personally how this works for allocating shares of a titled property but it requires an LLC to file a return and the basis advantage is lost for capital gains the in-laws could otherwise be exempt from. The in-laws share is proportional to their equity, and the heirs is proportional to the debt and on-going costs paid by the heirs provide further equity from the LLC.

Another might be paying of the debt, transferring title to a family trust that holds title. The in-laws essentially sell the home to the trust and rent it back, paying the trust which pays the tax and insurance. There are several trust structures that could identify how the assets are held. There is a lot of info on how to do this using a trust structure. There are specific rules on how long the in-laws can live in the home etc. I am not a lawyer but I have looked at a similar method for estate planning.

 

[athena53]

This is not the type of question that will elicit reliable advice from the internet. Come to think of it, I'm not sure that there are any questions that will elicit reliable advice from the internet. But it's great fun, of course.

It can, however, provide answers on what other people have done, elicit horror stories of how something might go wrong, etc.- all with the bottom line that the OP needs to consult a professional, but at least they've gotten some input.

I like the idea of the siblings buying the house and renting to the parents but a good attorney will be able to list all the possible issues- what if the house needs a new roof, what if they DISAGREE on whether the house needs a new roof, what if a sibling is unable to pay their share of the mortgage and upkeep, how is ownership protected if a sibling divorces, etc. The more the OP thinks through these things beforehand, the better.

 

[Sunset]

It can, however, provide answers on what other people have done, elicit horror stories of how something might go wrong, etc.- all with the bottom line that the OP needs to consult a professional, but at least they've gotten some input.

I like the idea of the siblings buying the house and renting to the parents but a good attorney will be able to list all the possible issues- what if the house needs a new roof, what if they DISAGREE on whether the house needs a new roof, what if a sibling is unable to pay their share of the mortgage and upkeep, how is ownership protected if a sibling divorces, etc. The more the OP thinks through these things beforehand, the better.

+1
The discussion people have elicits new ideas and questions that will allow the OP to at the least ask a broad spectrum of questions rather than simply accept the first thing suggested by some professional/lawyer.

 

[OldShooter]

It can, however, provide answers on what other people have done, elicit horror stories of how something might go wrong, etc.- all with the bottom line that the OP needs to consult a professional, but at least they've gotten some input.

True enough but one size fits none, especially in this area.

For example, my wife was a Senior VP/Investments & Trust and business unit manager for one of the too-big-to fail banks. One of the planning errors that she saw repeatedly was people not understanding the basis step up on death. That may bear on your idea. Another potential error is transferring assets within the look-back period for Medicaid assistance. This can be particularly messy if the transferred asset is illiquid and must be sold to pay the nursing home bills. Medicaid is so complicated that there are specialist attorneys. And there's more .... Hence the critical need to consult an expert.

 

[Sunset]

The best solution is to talk to an elder law attorney or a trusts & estate attorney who knows your state's laws. This is not the type of question that will elicit reliable advice from the internet. Come to think of it, I'm not sure that there are any questions that will elicit reliable advice from the intenet. But it's great fun, of course.

We might as well close the site down, since it has no real value

 

[imoldernu]

One possibility to look into, is a reverse mortgage when the time comes. This keeps the delicate balancing act with legal costs and potential family disagreements out of the picture.

https://reversemortgageguides.org/?leadint_source=GooglePPC&gclid=Cj0KEQjw0v_IBRCEzKHK0KiCrKMBEiQA3--1Nn4l7BQGS6PIrkishS3Ug0RPvWd-VOA1KOfuf3yLtE0aAmQT8P8HAQ

As to medicare "taking" the house, as long as one spouse is living in it... medicaid will usually pay nursing home care bills after spending down to the state limit, and only place a lien on the home, to be paid if or when the second spouse moves or dies. Check the elderlaw website for details.

https://www.elderlawanswers.com/
Specific to the situation...
https://www.elderlawanswers.com/protecting-your-house-after-you-move-into-a-nursing-home-6897

 

[Walt34]

I'd definitely agree on seeing an attorney before doing anything. I'm sure all of them have horror stories about families owning multiple-owner properties as athena53 pointed out.

 

[Nightcap]

The parents could lose the house by one becoming sick and medicare takes the house.

Best solution would be to buy the house outright and let them live there. Have a written agreement on the % paid by each party and agreement to sell it once they are no longer needing it (dead, etc).

Isn't the homestead protection agreement designed to prevent a creditor from taking the house?

 

[Car-Guy]

Come to think of it, I'm not sure that there are any questions that will elicit reliable advice from the intenet.

I can't think of many (any?) answers/information I get on an open Internet forum that I would "take to the bank" so to speak. However, I've often found "stimulating answers or questions" that help me in thinking through "my" issues or questions. This forum seems pretty good, usually , but there is still a good bit of mis-information given out here from time to time. (often, but not always, bad info is challenged here) Trouble is, if you are not a subject matter expert on the particular topic, it can be hard to pick out the truth/facts. Too many people present their opinions as facts. Many times, common sense can go a long way in helping you make that determination.

 

[Luck_Club]

I like the idea of the siblings buying the house and renting to the parents but a good attorney will be able to list all the possible issues- what if the house needs a new roof, what if they DISAGREE on whether the house needs a new roof, what if a sibling is unable to pay their share of the mortgage and upkeep, how is ownership protected if a sibling divorces, etc. The more the OP thinks through these things beforehand, the better.

OP is thankful for advice. Because attorneys are in the business of selling time. Knowing a general direction is going to be more cost effective.

My thought was buy out the debt according to ability, and gift the equity proportionately to the parents desires. Since DW & I have deepest pockets, I thinks we will be locking up more of our cash in the house, than the other siblings. Upon reading this I'm thinking and writing like a socialist.

I hadn't even thought about maintenance cost splitting, and assumed the parents would still cover that piece for the most part. That could create a few issues.

 

[gerntz]

Hi the situation is my wife and I are discussing buying her parents home with her two siblings to make it easier on her parents. The parents still have a mortgage and work 9 days a week between them @ 73 tears old. We are estimating the debt is somewhere between $100K-$150K, and the town assess the property at $240K.

The general thought is my wife and her two siblings would put up the money to retire the debt leaving the parents with only taxes, utilities and insurance. Then they wouldn't need to work so much or worry so much. They are spenders, so they may not slow down the work schedule, but increase their spending.

What are the possible downsides to this plan and how would you structure it so the money invested, which may not be equal, and the heirs are treated fairly, when the parents either pass or move to some other housing arrangement?

So are you talking buying the house - your names on the deed - or just paying down their debt so they can spend more & possibly take out another loan out against their property ownership? Thanks.

 

[Luck_Club]

So are you talking buying the house - your names on the deed - or just paying down their debt so they can spend more & possibly take out another loan out against their property ownership? Thanks.

Yes buying the house outright, with our names on the deed. No mortgage planned.

 

[Luck_Club]

One option might be a LLC partnership providing equity shares to each heir and your inlaws. I know personally how this works for allocating shares of a titled property but it requires an LLC to file a return and the basis advantage is lost for capital gains the in-laws could otherwise be exempt from. The in-laws share is proportional to their equity, and the heirs is proportional to the debt and on-going costs paid by the heirs provide further equity from the LLC.

Another might be paying of the debt, transferring title to a family trust that holds title. The in-laws essentially sell the home to the trust and rent it back, paying the trust which pays the tax and insurance. There are several trust structures that could identify how the assets are held. There is a lot of info on how to do this using a trust structure. There are specific rules on how long the in-laws can live in the home etc. I am not a lawyer but I have looked at a similar method for estate planning.

The LLC structure in our state is horrible. It requires about $550 a year in separate fees, and is difficult to dissolve often taking two tax years to complete. For that reason we would if a company needs to be formed just form a partnership. I was thinking simple written agreement between the 3 stating how to divvy up the asset when no longer needed.

The trust and step up in basis is something to consider. Since another 20 years could see another $200K to $250K in equity build up. Maybe we just retire the debt filing a Mtg Lien against the value of the debt protecting it against any potential law suits nursing home or other.

Then again at 73 that is a good time to remove assets for nursing home protection.

 

[pjigar]

Without going in the details: Lending money with good intentions to family always results in worst financial condition for family member and broken relationships. The underlying reason is that you can't take bad habits out of a person unless he/she wants to. And if they change their habits then their financial health will improve with or without your help.

PS: FWIW I don't help family members until they are in emergency situation (without any expectation of pay back). They appreciate such help more and I am hoping some day it will trigger change in their behavior. May be wishful thinking.

Dialog from "The Day the Earth Stood Still":

Professor Barnhardt: There must be alternatives. You must have some technology that could solve our problem.
Klaatu: Your problem is not technology. The problem is you. You lack the will to change.
Professor Barnhardt: Then help us change.
Klaatu: I cannot change your nature. You treat the world as you treat each other.
Professor Barnhardt: But every civilization reaches a crisis point eventually.
Klaatu: Most of them don't make it.
Professor Barnhardt: Yours did. How?
Klaatu: Our sun was dying. We had to evolve in order to survive.
Professor Barnhardt: So it was only when your world was threated with destruction that you became what you are now.
Klaatu: Yes.
Professor Barnhardt: Well that's where we are. You say we're on the brink of destruction and you're right. But it's only on the brink that people find the will to change. Only at the precipice do we evolve. This is our moment. Don't take it from us, we are close to an answer.

 

[bingybear]

I'm not sure how you are going to set up the house/rental... the following from this link

Her parents had a better idea. Financially stable with a paid-off mortgage, they would purchase a home for dear daughter to live in. The daughter could rent from her parents at a reduced rate, and the parents could deduct expenses of the rental property their tax return. Win/win?

Possibly not, since special rules apply when renting property to family members. Anyone unaware of these rules can find themselves taking a double tax hit when their rental deductions are disallowed while rental income is taxed.

also, if on child might pay more up front and then be reimbursed by another... is this a loan?

Interest-free loans
If you loan a significant amount of money to your kids, say, enough to buy a house, it’s important to charge interest.

If you don’t, the IRS can determine that interest you should have charged was a gift. (In addition, the borrower may be more motivated to actually pay you back if there’s interest involved!)

The rate of interest on the loan must be at least as high as the minimum interest rates set by the IRS.

You don’t have to worry about skipped interest being subject to gift tax rules unless the interest you should have charged, combined with other gifts to the same person, exceeds $14,000 in 2013.

Family Loans: Does The IRS Care If I Lend My Kids Money? - TaxAct

Loans that are really gifts
Some people may think they can give large amounts of money to their children and say it’s a loan, thus avoiding the hassle of filing a gift tax return.

The IRS is wise to that.

The loan must be legal and enforceable, or the whole thing may be deemed a gift.

Fortunately, it’s easy to make a loan legal.

Write a note that shows the loan amount, when it will be paid, the rate of interest, and any collateral or security (such as a car).

Have both parties sign the note, and keep it in a safe place.

For very large loans, or for loans attached to real estate, seek legal counsel to make sure you’re covered.

If any of you are getting into below market loans or free rent... you could be creating gifting according to the IRS.

If you're going to hold this joint with many owners, then really look at the legal structure. Just held joint could put the house at risk if one owner had a legal/financial problem.

Document how much each pays and when, how maintenance is done and paid for... everything. What happens when an owner dies, divorces, etc.

You'll need to insure this house. How will the ownership format effect the cost or availability insurance?

A lot of family dynamics to wrap your head around.

 

[Gill]

Isn't the homestead protection agreement designed to prevent a creditor from taking the house?

What is that? Florida has such a statute but it's not universal.
Gill

 

[Taxman59]

Unless I missed something, the OP said they were going to buy the home from the parents and the parents would pay the property taxes, insurance and utilities as rent. If that is the case, there is no risk of losing the house due to the parents bills or Medicaid, they are tenants. The problem would be, as others have said, if the siblings got into financial difficulty or divorce.

 

[Gill]

Unless I missed something, the OP said they were going to buy the home from the parents and the parents would pay the property taxes, insurance and utilities as rent. If that is the case, there is no risk of losing the house due to the parents bills or Medicaid, they are tenants. The problem would be, as others have said, if the siblings got into financial difficulty or divorce.

Yes there is a risk. Are you familiar with a fraudulent conveyance or a transfer to avoid creditors?
Gill

 

[Taxman59]

Yes there is a risk. Are you familiar with a fraudulent conveyance or a transfer to avoid creditors?
Gill

A sale of property at fair market value (and there is a wide range of values that can be used) would no be a fraudulent conveyance. The transfer to avoid creditors wouldn't apply since the $$ the children paid would be available for the creditors (to the extent that the funds aren't spent for care).

 

[Gill]

A sale of property at fair market value (and there is a wide range of values that can be used) would no be a fraudulent conveyance. The transfer to avoid creditors wouldn't apply since the $$ the children paid would be available for the creditors (to the extent that the funds aren't spent for care).

Thanks for the lesson in the law, but there is still considerable risk when the transfer is between closely related parties such as parents and children. Creditors could go after both the cash and the transferred real estate.
Gill

 

[Car-Guy]

This has been an interesting thread since I'm in a "similar" situation. I have a house (currently vacant) that I don't need or want and was thinking of just selling it. However, I also have a close relative that really needs a place to live in the same area but they really can't afford to buy a house. I'd like to give the house to the relative but I'm afraid they would sell it or take out loans against the house or reverse mortgage it, etc, just to get cash. Also, if I give it to them, I'll face a gift tax which I don't feel is fair to have to pay. As I look into this, it sounds like even if I keep ownership in my name and not charge them any rent, I'd get hit with a gift tax anyway. . I've read about a lifetime gift exclusion tax option so, I guess it's time to talk to a lawyer to see what I can do to help someone out that I care about without paying more taxes and somehow protecting them at the same time.

I guess I'd rather pay a lawyer for guidance than pay the government anymore tax and get little to nothing for it.

 

[H2ODude]

This has been an interesting thread since I'm in a "similar" situation. I have a house (currently vacant) that I don't need or want and was thinking of just selling it. However, I also have a close relative that really needs a place to live but really can't afford to buy a house. I'd like to give the house to the relative but I'm afraid they would sell it or take out loans against the house or reverse mortgage it, etc, just to get cash. Also, if I give it to them, I'll face a gift tax which I don't feel is fair to have to pay. As I look into this, it sounds like even if I keep the title in my name and not charge them any rent, I'd get hit with a gift tax anyway. . I've read about a lifetime gift exclusion tax option so, I guess it's time to talk to a lawyer to see what I can do to help someone out that I care about without paying more taxes.

Wouldn't you be able to use the $14,000 gift tax exclusion to cover this? If married you and DW could double that. And if relative has a spouse you could double again. I'm assuming this could defuse the rent free option.