Buying house for parents- taxes

[medicoFIRE]

So we would like to buy a house for our parents so that they can be closer to our kids (and help with childcare occasionally). We would be letting them live there for free. Is there a tax implication to this? Im guessing we would have to consider the fair market value of rent as a gift and just report that on tax return for the gift amount against the lifetime allotment.

Alternative is to just help with downpayment on house and let it be in their name with the goal of arriving at the same payment they currently pay at their current house. Then they are free to do with it as they wish at a later date. Also unsure of tax implications related to that.

Also open to other suggestions for any of those who have done this for parents who can’t justify moving from a financial standpoint but may be willing to move if we helped them. We haven’t discussed this with them at all so they may not even be amenable to it regardless of finances. Just thinking ahead for the best way to approach this from a tax/financial standpoint if they would choose to accept our help financially and agree to move.

[Tangler]

So we would like to buy a house for our parents so that they can be closer to our kids (and help with childcare occasionally). We would be letting them live there for free. Is there a tax implication to this? Im guessing we would have to consider the fair market value of rent as a gift and just report that on tax return for the gift amount against the lifetime allotment.

Alternative is to just help with downpayment on house and let it be in their name with the goal of arriving at the same payment they currently pay at their current house. Then they are free to do with it as they wish at a later date. Also unsure of tax implications related to that.

Also open to other suggestions for any of those who have done this for parents who can’t justify moving from a financial standpoint but may be willing to move if we helped them. We haven’t discussed this with them at all so they may not even be amenable to it regardless of finances. Just thinking ahead for the best way to approach this from a tax/financial standpoint if they would choose to accept our help financially and agree to move.

No clue. Not sure why there is tax implications. Might just be my ignorance but I think you can own a house and let whoever you want live there for free?

IMO why does the IRS need to know who lives in the house? Just consider it a second home (vacation home) etc. and call it a day?

Seems like you are overthinking this, but I am just a dumb doc. Why do you need to report rent that was not charged?

Do you really need to report the rent not charged as a gift to your parents? They are family. Taxes suck.

My mother-in-law lives in my house. Rent free (of course). I don't do extra paper work. Why would I?

[Tim]

You can have a second residence and claim personal deductions (RE tax and interest). You will pay gains on it when sold.

You can gift them as needed and have them own and claim personal deductions as well. The advantage here is a step up in basis when you inherit it. Additionally, likely homestead exemption for them on RE taxes.
https://turbotax.intuit.com/tax-tips...ners/L5Mzc5URo

The rental path gets really complicated, requires FMV rent and the you pay taxes when it’s sold.

Corrections to the above are welcomed. Not an expert.

[StarTrekDoc]

We simply own in our own name.

We didn't see any advantage in their ownership unless there's some property tax break transfer like here in California.

[spiritrider]

No clue. Not sure why there is tax implications. Might just be my ignorance but I think you can own a house and let whoever you want live there for free?

IMO why does the IRS need to know who lives in the house? Just consider it a second home (vacation home) etc. and call it a day?

Seems like you are overthinking this, but I am just a dumb doc. Why do you need to report rent that was not charged?

Do you really need to report the rent not charged as a gift to your parents? They are family. Taxes suck.

My mother-in-law lives in my house. Rent free (of course). I don't do extra paper work. Why would I?

Why, because there are specific tax rules for such situations.

While a direct family member such as a MIL can generally live rent-free in your own home without tax implications. If you let anyone other than a dependent* live in another property you own and don't charge them a fair market value (FMV) rent you can't claim most deductions including depreciation.

If you charge them FMV rent, any amount over the gift tax annual exclusion amount must be reported on Form 709. However, it doesn't cause any taxation until you exceed the gift tax lifetime exclusion.

*In certain circumstances it could be considered a family support obligation.

[medicoFIRE]

Thanks for the comments. I guess I’m just trying to find the most cost effective way to make this happen. I’m not really worried about losing a little money because it’s not an investment. More a luxury expense we are willing to take on to make this move for palatable for the parents. Dad is still working an has a business for which he itemizes taxes. So I’m guessing he itemizes taxes. Taking that into account perhaps it would be better to just gift him 150k, report that on my taxes as part of the gift allotment (we’ll never reach the amount to make it taxable) and then he will have the ability to deduct interest and property tax on his tax bill. It will save him money and will achieve the result we want. Ideally any future inheritance shared by siblings would give us 150k more but honestly not even worried about that and would be fine with however they decide to dole it out. 150k will be a drop in the bucket compared to the value we would obtain by having them nearby.

[White.Beard.Doc]

One of our kids lives nearby with his spouse and their 7 month old baby. We help a lot with child care for our first granddaughter. It is as much a joy as it is work. Their home is a five minute drive away, and seeing our granddaughter almost every day is a special treat. We just finished giving her a bath, reading her a story, and played some music on the piano, which she loves. As they say in the Mastercard commercials, priceless!

[Tim]

Thanks for the comments. I guess I’m just trying to find the most cost effective way to make this happen. I’m not really worried about losing a little money because it’s not an investment. More a luxury expense we are willing to take on to make this move for palatable for the parents. Dad is still working an has a business for which he itemizes taxes. So I’m guessing he itemizes taxes. Taking that into account perhaps it would be better to just gift him 150k, report that on my taxes as part of the gift allotment (we’ll never reach the amount to make it taxable) and then he will have the ability to deduct interest and property tax on his tax bill. It will save him money and will achieve the result we want. Ideally any future inheritance shared by siblings would give us 150k more but honestly not even worried about that and would be fine with however they decide to dole it out. 150k will be a drop in the bucket compared to the value we would obtain by having them nearby.

Sounds like a winner. I know the inheritance is not a big issue for you. If anyway possible, it is best that the information is shared by your parents. Whatever the amount put into the house exits to you before the pot gets divided. The house may be sold, the benefit of any appreciation or taxes is in the pot. The only thing you have a desire for is the repayment of the gift. I would also ask that if the house ends up being sold that the amount be returned. These are not legal contracts or loans. Simply is they no longer need your gift, they are free to gift it back. The important thing is your siblings understand your parents and you are simply keeping them informed. Avoids a lot of surprises.

[AR]

So we would like to buy a house for our parents so that they can be closer to our kids (and help with childcare occasionally). We would be letting them live there for free. Is there a tax implication to this? Im guessing we would have to consider the fair market value of rent as a gift and just report that on tax return for the gift amount against the lifetime allotment.

Alternative is to just help with downpayment on house and let it be in their name with the goal of arriving at the same payment they currently pay at their current house. Then they are free to do with it as they wish at a later date. Also unsure of tax implications related to that.

Also open to other suggestions for any of those who have done this for parents who can’t justify moving from a financial standpoint but may be willing to move if we helped them. We haven’t discussed this with them at all so they may not even be amenable to it regardless of finances. Just thinking ahead for the best way to approach this from a tax/financial standpoint if they would choose to accept our help financially and agree to move.

Here's one approach

1. Give your parents money to buy house in cash as a loan. Parents buy house in their name.
2. Each year your parents will pay you the minimum amount of interest on this loan to make it not a gift (look up rate on IRS website).
3. Every year you forgive a portion of the loan as a gift. You and your wife can give parent and wife 15k each, so that comes out to 60K/year of loan forgiveness. If you want you could include the interest from step 2 in the gift and then you forgive less than 60K/year
4. Repeat step 3 annually until entire debt is forgiven
5. Now parents own the house without any outstanding debt
6. At some point parents die, and leave the house to you
7. You get a step up basis at death and can sell the house without paying capital gains



Anyone see any problems with that?

[Tim]

Here's one approach

1. Give your parents money to buy house in cash as a loan. Parents buy house in their name.
2. Each year your parents will pay you the minimum amount of interest on this loan to make it not a gift (look up rate on IRS website).
3. Every year you forgive a portion of the loan as a gift. You and your wife can give parent and wife 15k each, so that comes out to 60K/year of loan forgiveness. If you want you could include the interest from step 2 in the gift and then you forgive less than 60K/year
4. Repeat step 3 annually until entire debt is forgiven
5. Now parents own the house without any outstanding debt
6. At some point parents die, and leave the house to you
7. You get a step up basis at death and can sell the house without paying capital gains



Anyone see any problems with that?

6. No way to insure the siblings or the parent's will goes alone with the plan. Taking 100% of the house and gains could actually cause some hard feelings. It could work and leave the siblings with zero or peanuts. Depends on the perception.

[AR]

6. No way to insure the siblings or the parent's will goes alone with the plan. Taking 100% of the house and gains could actually cause some hard feelings. It could work and leave the siblings with zero or peanuts. Depends on the perception.

Yeah, that's definitely a concern. As described, you essentially paid for the whole house, so siblings should not have any reason to complain. But often others can be highly unreasonable about such things. If your family is such that you can't count on executing this smoothly, then don't do it.

[StarTrekDoc]

Money and family often doesn't mix well. We keep it simple to avoid things like that. We own the place and siblings won't have problems with our sunken costs.

Inheritance can be problematic otherwise. 'fair is fair' rules, right?

[Tim]

Money and family often doesn't mix well. We keep it simple to avoid things like that. We own the place and siblings won't have problems with our sunken costs.

Inheritance can be problematic otherwise. 'fair is fair' rules, right?

We are keeping a residence under our name as well. Hint, behind our back my wife's sibling have hit up MIL for loans for vehicles telling her she own's two houses and is rich. This problem was anticipated, everyone wants to divide assets in advance and not even wait. MIL is "broke", but 100% insured by Dad's (SIL) Bank. The reality is they really don't realize that MIL needs every penny. Family dynamics get complicated. Just a different perspective. Most think spending time in the last month earns them "stuff". Sorry, a 10 year burden and risk counts, keep your fingers out of the cookie jar. It's a mess.

[medicoFIRE]

Yeah I’m lucky to not really have any money grubbing immediate family. If we throw money at them for a downpayment I don’t really expect to see if ever again, but if I do then great. The childcare help will probably be worth the money anyway. No better childcare than that delivered by family. I don’t like the idea of strangers taking care of young children especially in a nanny setting. We may do a night nurse for the next child but haven’t decided yet. Will have to vet them thoroughly and put cameras in the baby room for peace of mind

[Tim]

Yeah I’m lucky to not really have any money grubbing immediate family. If we throw money at them for a downpayment I don’t really expect to see if ever again, but if I do then great. The childcare help will probably be worth the money anyway. No better childcare than that delivered by family. I don’t like the idea of strangers taking care of young children especially in a nanny setting. We may do a night nurse for the next child but haven’t decided yet. Will have to vet them thoroughly and put cameras in the baby room for peace of mind

100% agree!
Child care especially.
Money grubbing immediate family is not necessarily what causes inheritance problems.
30 years from now, a spouse or child or even some person plants a seed of “what is right”. It becomes a matter of “principle” and they get legal advice. The written will then becomes the playing field. Their “kids” spouse could be the instigator. The point is that “inheritances” take strange turns and are governed by emotions. Just like divorces often turn nasty.
Some type of communication might avoid the emotional damage which is probably more important than the cash. Family decision upfront would be my thoughts.