Buying Parents House

Member since 2019 · 6 posts · 6 votes

I've been talking with my parents about potentially buying their house to 1. free up cash for their retirement and other real estate investing 2. realize tax benefits for depreciation and the house is 30 years old and needs some improvements/updates 3. get the house in my name in case they have immediate health issues

I have a few questions if anyone has experience/input on these topics or if you have any input on things I'm not thinking about.

1. They bought the house for around $200k and now neighborhood comps are around $440k - am I able to buy the house below market value or would this create a red flag renting the house back to them?

2. Are they able to gift the downpayment or not being an investment property for me.

3. When collecting rent on the house - can I just get data from rentometer or craigslist and stay within 20% of that to not flag IRS.

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Mike S.

Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes

I would on the opposite buy it for a higher price. They should be able to get 121 exclusion to up to 500k. So I would buy it for 700k. You can then start the depreciation higher and you would later on get less capital gain when you sell. Also, have your parents sell it under installment so you will pay a little bit every year. Your parents can also gift you each year some money up to the tax free limit. There are a lot of way that you can mix and match all these strategies to make it work for your specific situation.

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Richard Davis III
Realtor · Southeast WI · Member since 2019 · 36 posts · 13 votes
7y
You can buy the house for any price you want I believe. Not sure why this would matter at all?
They should be able to gift you the down payment. You may have to wait to sign the lease with them (are you going to have a lease with them?) until after closing.
The IRS just wants you to pay taxes on the rent income. I'm charging my mother-in-law like 35% under market for my area. I have her check every month to prove I am recording the right amount.

Double check with your accountant (get an accountant if you don't have one) but there shouldn't be any issues with the stuff you're asking.
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Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
7y
I would on the opposite buy it for a higher price. They should be able to get 121 exclusion to up to 500k. So I would buy it for 700k. You can then start the depreciation higher and you would later on get less capital gain when you sell. Also, have your parents sell it under installment so you will pay a little bit every year. Your parents can also gift you each year some money up to the tax free limit. There are a lot of way that you can mix and match all these strategies to make it work for your specific situation.
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Melody E Bergloff
CPA · UT · Member since 2019 · 55 posts · 19 votes
7y
@Richard Davis III @Mike S. @Greg Seldon
I think Richard and Mike are on point about the gift aspect of your post. I would not buy or have your parents gift you the property though. If your parents gift you the property, you generally will get a carryover tax basis (i.e. the basis that the parents have in the property). Hence, when the property is sold, there is still a lot of unrealized appreciation that is taxable.
I would recommend your parents hold the property and bequest the property to you when they pass away. The property will get a step-up in basis (i.e. the basis = the FMV). In other words, all of that unrealized appreciation gets wiped out.
I would definitely talk to a tax professional and strategize further.

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Jess Woodruff
Member since 2020 · 1 post · 0 votes
6y
There is something to be said about putting the house in your name no matter how you do it. If something happens to your mother or your father and they have to go into assisted living. Most often than not, you have to list there assets. If the house is in there name, it could be taken away. In the state of PA, I need the house to be in my name for a minimum of five years or the assisted living home could use it as collateral. You have to be careful and plan ahead.
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