Buying Parents' Home - Ways to reduce costs and hassle?

Question

Husband and I are considering buying his parents' home and I have some questions about this and would love any feedback on how to minimize hassle and our costs. We're doing this for two main reasons: 1) Prevent his dad from doing something like a reverse mortgage and 2) Minimize the amount of money we need to contribute to their care.

We're currently paying for lawn care, snow removal and cleaning services + husband is doing some of their home maintenance himself. They are covering cost of insurance, taxes, utilities and all medical expenses which are rapidly draining their available funds. We were going to start gifting them money to help cover those expenses when the idea came up of buying their house to give them a cash infusion. (We're aware of the five year look back period for Medicaid eligibilty but it's not a big factor in our decision to do this.)

We would get the house appraised so we can document paying FMV.
House would be purchased with cash (it's a small home in a rural area and value is low)
Inlaws would sign a lease so that it becomes a legitimate rental and we can deduct expenses, etc.

*Do we charge them rent and then gift that amount back to them (the FMR is well below annual gift limits) or can we gift them rent and still deduct expenses on our taxes?
*Could we deduct the expenses of any modifications made to make the home more accessible (ie adding a ramp to the front door)?
*Anything else I should consider?

We are going under the assumption we would sell the home after they pass so as to not be seen by siblings as making money off the situation. I'm not sure the house would make a good rental property anyways as rent estimate is below 1% of value.

Ashish Acharya · Answer

@Dina Schmid Inheriting a property is the best way to get property form parents, but looks like this is small transaction because of the property value so inheriting is not absolutely necessary. Rent vs. Gift: You can charge rent and deduct expenses on your taxes, as long as the arrangement is legitimate (lease in place, rent at fair market value). You can then gift the rent back to them, staying under the annual gift limit ($17,000 per person in 2024). Alternatively, if you gift the rent outright, you can't deduct expenses. Home Modifications: Yes, you can likely deduct expenses for modifications like adding a ramp, as long as the home is considered a rental property and the improvements meet IRS guidelines for being necessary improvements.*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Drago Stanimirovic · Answer

Hi Dina,Buying your in-laws' home is a smart way to prevent a reverse mortgage and provide support for their care. You can charge rent at fair market value and then gift the rent back under the annual gift tax limit. As long as the arrangement is legitimate, you'll still be able to deduct eligible expenses like property taxes and maintenance costs. In terms of accessibility modifications, such as adding ramps, these could likely be deductible as capital improvements on a rental property. It’s best to consult a tax professional to confirm the specifics of these deductions. Also, paying fair market value for the home is crucial for documentation and avoiding any potential disputes with siblings. While the Medicaid look-back period isn’t a major concern for you, it's still good to stay aware of it. If you need more advice on financing or tax matters, don’t hesitate to reach out! Best,Drago

Dina Schmid · Answer

Thanks @Drago Stanimirovic. I will definitely be consulting a tax professional with this, but I do think we can make it work. (I know BP is focused on making money through REI where this scenario is really about using RE laws to minimize losing money.)

Rick Albert · Answer

I don't think this is a good idea for the sole fact that you intend on selling after his passing.Once they pass (which I hope is a long time from now), those who inherit the house will benefit from the step up tax basis, meaning the net proceeds could be TAX FREE. If you buy now and sell, you are hit with a tax bill. No one wins. You can try to claim this as an investment property but if the IRS catches wind they are going to see that you are directly related to the "tenant."Plus depending on how much equity they have, only the first $500K is tax free. Anything after that is taxed. Another loss.I would actually explore the reverse mortgage or talk to an attorney/tax professional about you being a private lender and maybe structuring that way. The parents get tax free money and when you sell you get your money back and the rest may be tax free because of the step up basis.It is imperative that you speak with a tax professional on this. I cannot give tax or legal advice, but this is based on my understanding (recently dealt with an inherited property).

Kerry Baird · Answer

@Ashish Acharya, thanks for your expertise. That's such a great answer.

Dina Schmid · Answer

Thanks. This will likely be the scenario moving forward.

Dina Schmid · Answer

Thanks for the response. I don't want to go into details on a public forum, but the house is worth very little and at their age/state of health, they will really need the full amount from their house. I will definitely speak to a tax professional about this to see what the best way is to get them the funds they need in a dignified way and also minimize the amount of it that comes directly out of our pocket. And to address something earlier - siblings talk regularly, know the funds are limited and all expect a $0 inheritence. This idea isn't coming out of the blue.

Dina Schmid · Answer

We were already planning that. I always like to go into things like that having done my homework.

Theresa Harris · Answer

I'd also talk to his siblings, so that they know what the situation is.

Kerry Baird · Answer

I recommend talking with a CPA who knows your personal situation. You may (probably) have options you have not considered.