how to help my parents buy a house

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BobbyB
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Joined: Thu Apr 22, 2021 7:29 am

how to help my parents buy a house

Post by BobbyB »

We would like to move my parents close to where my sister lives. The problem is that their house (which they own with no mortgage) is only worth about half of what a small house in a 55+ community costs near where my sister lives.

Our goal is to get them into a new house without a new mortgage payment. Their social security and pension income is enough to keep up the house: property taxes, insurance, utilities, maintenance, and HOA fee, but not enough for additional housing payments, i.e. principal, interest, or rent.

My sister and I are willing and able to put in some money to make this happen. One obvious way to do this is just to gift them the money. However, I understand it's generally not good practice to move money/assets upstream, i.e. to older generations. And I think my sister and I would like some guarantee that we'd eventually get our contribution to the house back.

Let me put some rough numbers to it:
  • proceeds from my selling parents current house = $180K
  • cost of a house near my sister = $360K
My parents do have some cash sitting around that they could put into the new house and still have a comfortable cash cushion. We're thinking that they could put in $60K, so that would leave a gap of $120K.

Here are two options that we're considering.

Option 1
  • My sister and I loan $120K to my parents, and they buy the house only in their names. It's an "official" loan, at the applicable federal rate and with a mortgage / lien on the house. The term of the loan would be say 30 years, and they would not have to make any principal or interest payments until the end of the loan or until the house is sold. This would achieve our goal of not burdening them with extra housing payments for principal and interest.
  • I'm not completely sure whether this arrangement (the deferred interest and principal) would pass muster with the IRS (so that my sister and I don't have to report imputed interest income and pay tax on it).
  • However, assuming it does work, this is probably the most straightforward option, preserving our capital, and the tax consequences are pretty clear. After my parents die, the house would pass to me and my sister at a step up in basis. Or if the house is sold earlier, all the capital gain is tax free to my parents since it was their principal residence. One downside is that the eventual interest payment does effectively take some of my parents money that my sister and I would have inherited tax-free and turn it in to taxable income.
Option 2
  • My sister and I put in $60K of cash each, my parents contribution is $240K ($180K from selling their current house plus $60K from cash) and we pay cash for the house. The house is owned by all four of us, probably as Joint Tenants with Right of Survivorship (JTWROS).
  • This has the advantage of making our ownership interest in the house clear, and as JTWROS there is the added benefit of avoiding probate when one/both of my parents pass.
  • The tax consequences of this arrangement are a little more complicated though. In the state where my sister lives, joint tenants own equal shares of the property. At purchase, since my sister and I put in $60K each but received a 25% share of a $360K house (i.e. $90K), this would be a $30K gift to each of us, but that's within the annual gift exclusion ($15K from each parent). Ultimately (after our parents pass), my sister and I would each own 50%, but 25% of that is at our original basis, and the other 25% is at a stepped up basis (maybe 12.5% at a stepped up basis at the time of the first parent to pass and the other 12.5% at the time of the second parent to pass). Bottom line is that my sister and I will owe some tax on any capital gain.
  • We're aware that a disadvantage of joint ownership is that it could expose the house to my or my sister's creditors. However, we are both well enough off that it seems unlikely that we'll have creditors coming after our assets. And even if so, I think one of us could buy out the ownership of the other if it came to that.
Are there other arrangements we should be thinking about?

For what reasons should we pick one option over the other?

Thanks in advance for your advice.


P.S. Here's a situation that is close to ours but doesn't have the constraint on not making the parents pay for principal/interest or rent:

viewtopic.php?t=246936

To preemptively address some of the suggestions there:
  • The homes we are looking at are the cheapest homes within a 10-15 minute drive of my sister. While it's possible to find something cheaper say a 30-60 minute drive away, we all think it's worth it to have them near my sister since they are starting to need occasional help around the house.
  • The suggestion of using a LLC was interesting, but I'm not sure it offers any advantages to us worth the cost/trouble of setting it up. Also not sure if an LLC is allowed to own a home in this 55+ community.
  • Using a Family Limited Partnership or other trust to own the house -- since my parent's estate is well below the estate tax exemption, we don't need a trust for avoiding estate taxes. While a trust might be nice for avoiding probate, we can achieve that via joint ownership, so not sure it's worth the several thousand dollars to create a trust. Also, I think it's likely/possible that after one parent passes, the other parent might move to a condo.
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Sandtrap
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Re: how to help my parents buy a house

Post by Sandtrap »

What do your parents think of all this?
Do they want to move?
Their house is paid for and no debt. . .do they want new debt?
Have you or they or both spoken to legal counsel on how this fits in their estate planning?

j :D
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JoeRetire
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Re: how to help my parents buy a house

Post by JoeRetire »

BobbyB wrote: Thu Apr 22, 2021 8:22 am We would like to move my parents close to where my sister lives. The problem is that their house (which they own with no mortgage) is only worth about half of what a small house in a 55+ community costs near where my sister lives.

Our goal is to get them into a new house without a new mortgage payment. Their social security and pension income is enough to keep up the house: property taxes, insurance, utilities, maintenance, and HOA fee, but not enough for additional housing payments, i.e. principal, interest, or rent.

My sister and I are willing and able to put in some money to make this happen. One obvious way to do this is just to gift them the money. However, I understand it's generally not good practice to move money/assets upstream, i.e. to older generations. And I think my sister and I would like some guarantee that we'd eventually get our contribution to the house back.
Guarantees like that aren't what I call a "gift".
Are there other arrangements we should be thinking about?
Your sister and you give a real gift of whatever money your parents need to purchase the house with them as the sole owners.

Personally, I think having parents purchase a home they can't afford is a bad idea. If the goal is simply to be close to your sister, they should consider renting something as an option they can actually afford, or moving in with your sister, or one of you move closer to where they already live.
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Sandtrap
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Re: how to help my parents buy a house

Post by Sandtrap »

JoeRetire wrote: Thu Apr 22, 2021 11:21 am
BobbyB wrote: Thu Apr 22, 2021 8:22 am We would like to move my parents close to where my sister lives. The problem is that their house (which they own with no mortgage) is only worth about half of what a small house in a 55+ community costs near where my sister lives.

Our goal is to get them into a new house without a new mortgage payment. Their social security and pension income is enough to keep up the house: property taxes, insurance, utilities, maintenance, and HOA fee, but not enough for additional housing payments, i.e. principal, interest, or rent.

My sister and I are willing and able to put in some money to make this happen. One obvious way to do this is just to gift them the money. However, I understand it's generally not good practice to move money/assets upstream, i.e. to older generations. And I think my sister and I would like some guarantee that we'd eventually get our contribution to the house back.
Guarantees like that aren't what I call a "gift".
Are there other arrangements we should be thinking about?
Your sister and you give a real gift of whatever money your parents need to purchase the house with them as the sole owners.

Personally, I think having parents purchase a home they can't afford is a bad idea. If the goal is simply to be close to your sister, they should consider renting something as an option they can actually afford, or moving in with your sister, or one of you move closer to where they already live.
+1
Great points.
Well said!

j :D :D
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hi_there
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Joined: Sat Aug 29, 2020 7:00 pm

Re: how to help my parents buy a house

Post by hi_there »

I sympathize with the objective, but these proposals seem pretty complicated! Moving your parents closer to you is understandable. However, the cost is prohibitive without your financial support.

The easiest way is to just rent a place for them. Sibling and you can pay for the rental payments if you need to. You'll theoretically get the money back later, assuming your parents leave you any inheritance, since they would have saved their own capital. No need to deal with joint ownership or inheritance either.

Otherwise, if you really prefer to own the property for some reason, I would just buy the house and let the parents live in it. Work out between sibling and you who pays how much if anything.
sls239
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Re: how to help my parents buy a house

Post by sls239 »

Maintenance, taxes, insurance, HOA - these all tend to increase and can do so unpredictably.

If you are going to require the parents to contribute, you should make it a fixed expense since their income is fixed.
Topic Author
BobbyB
Posts: 13
Joined: Thu Apr 22, 2021 7:29 am

Re: how to help my parents buy a house

Post by BobbyB »

Thanks for the replies so far.

I've read enough similar threads on the Boglehead forums while researching this topic that perhaps I should have known to head off some of the standard objections. Yeah, I get it -- some people focus on the "micro" when they should be reconsidering the "macro", but I assure you that isn't the case here.

I omitted many details in order to focus on the core legal/financial question. But to fill in some of those blanks: yes, the parents are on board. And for me and my sister to put in $60K each towards a house for my parents will not cause any hardship or delay our retirement plans. My sister and I do plan to make sure our parents are taken care of, and my parents are responsible with their finances. I don't think it's unreasonable for us to want some eventual claim on our contribution, but unfortunately our tax/legal system makes this a bit complicated.

To respond to a few suggestions that have been made:
hi_there wrote: Thu Apr 22, 2021 11:49 am The easiest way is to just rent a place for them. Sibling and you can pay for the rental payments if you need to. You'll theoretically get the money back later, assuming your parents leave you any inheritance, since they would have saved their own capital. No need to deal with joint ownership or inheritance either.
I think having my parents rent is inefficient -- if renting from a third party, the rent pays for all the same expenses (taxes, HOA, maintenance, etc.) and for a profit to the landlord. Also, the rent will gradually deplete my parents' assets. Given that we (my parents and their children) have the capital, and we're happy to commit that capital without any expectation of return or profit, helping my parents purchase a house is a better solution for them.
hi_there wrote: Thu Apr 22, 2021 11:49 am Otherwise, if you really prefer to own the property for some reason, I would just buy the house and let the parents live in it. Work out between sibling and you who pays how much if anything.
That would put all the cost of my parent's housing on me and my sister. While that would be a noble thing to do, that would cause some financial hardship for me and my sister, while my parents have assets (the $240K) and some income that can cover housing expenses. If we did charge my parents some rent, this just serves to deplete their assets while paying off the mortgage for me and my sister. And that rent should be fair market rent lest our rental activity be considered not-for-profit which would invalidate deducting expenses from the rental income.

Or maybe since I live far enough away, I buy the house which would be considered a second home for me (so mortgage interest is tax deductible), and my parents and sister contribute to expenses and mortgage payment. But there's still a bank loan (the mortgage) to provide capital that we already have sitting around, and of course we'd be paying for the lender's title insurance, etc. So we've considered these options but I don't think it's a better option than the two I listed in my original post. I'd be happy to be convinced otherwise.
sls239 wrote: Thu Apr 22, 2021 11:50 am Maintenance, taxes, insurance, HOA - these all tend to increase and can do so unpredictably.
Fair point -- at some point my sister and I may need to help my parents cover operating expenses of the house, and we'll do so if/when that time comes. I am curious what the tax consequences of that would be, but my guess is that by that time one of them might have passed which could lead to selling the house and downsizing to a condo.
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