How to buy your parents’ house and rent it to them
With the massive recession from 2008 to 2009 in full swing, credit markets have dried up. For this reason, many of us have had to resort to creative forms of financing, one of which is the classic transaction known as sale-leaseback. You can create pretty decent amounts of income and estate tax savings by buying your parents’ home and then renting it out to them.
These types of arrangements allow tax deductions for your parents if they are over 55 years old. If so, the tax law will allow them to exclude up to $ 125,000 in profit from the sale of the home.
There are many advantages to a sale and leaseback agreement.
The first advantage is that the future appreciation of the house is no longer included in the inheritance of your parents. This can be a pretty big tax break, right out of the box.
The next advantage is for the person who buys the house … that is, you. By owning your parents’ home, you can protect some of your own income by deducting the expenses of owning the home, as well as maintenance and depreciation of the home.
The next advantage is for your parents; It is very simple in the sense that they simply receive cash in exchange for the equity they have accumulated in their home. Think of it like getting a home equity loan that you never have to pay back.
The next advantage is one that I mentioned earlier, and that is that your parents will get a one-time tax exclusion of $ 125,000 on the profit they receive from selling the house to you.
The next advantage is a little less tangible, but it is the fact that your parents will enjoy the advantages of renting. They will no longer necessarily have to take care of maintenance and upkeep, that will be their responsibility from now on. At the same time, they enjoy living in the same house that they are used to.
A sale and leaseback could make a lot of sense if your parents are elderly and have trouble supporting themselves. If you are already paying for their support, this can be an attractive way to continue to support them with a tax advantage.
And it’s a way for your elderly parents to keep up appearances a bit because not only will they receive gifts from you as support, but they will sell you their house that you can eventually sell once they are gone.
There are several technical aspects that must be maintained in order to create a valid sale and leaseback agreement. For example, the home must be purchased at fair market value and your parents must sign an actual lease. It should be clear that your parents do not plan to buy the property back from you in the future, and it should also be clear that your parents are no longer in control of the home.
Before getting into one of these arrangements, make sure it is run by your local accountant or CPA to make sure you have crossed all the T’s and dotted all the i’s.