BUY MOM and DAD'S HOUSE, AND RENT IT BACK

So your aging parents live in a home that has soared in value, but they’re no longer getting any of the homeownership tax breaks during their retirement. Sound Familiar?

GOOD NEWS.
With one stroke of the pen, both you and your parents can win. They’d gain instant access to their home equity, without moving, and you’d pick up some generous new tax deductions. How? Buy your parents’ house, and then rent it back to them, at the going rate.

REASONS FOR THE SALE & LEASEBACK.
Under the current home-ownership setup, your combined family unit is overpaying the IRS. Your parents mortgagee is either paid off or the payments represent mostly principal at this point. Even if they still take interest deductions, your parents’ tax bracket might be low in retirement, so those deductions don’t provide much tax savings. In fact, many retirees take the standard deduction rather then itemizing.

Here are two good reasons for your parents to opt into this plan:

1. It puts cash in their pockets without having to refinance or dip into a home equity loan;
2. It allows them to put their money into safer investments than the real estate market.

TRANSFERING THE HOUSE.
To avoid gift-tax complications, pay a fair price for the home. Support the buying price with newspaper listings of similar homes. Then, both sides should enter into a lease at a fair rental value.

One benefit: Courts have said that landlords can reduce their fair market rent by 20% when renting to relatives. That lower rent reflects the savings in maintenance and management costs. (L.A. Bindseil Tax Court Memo 1983-411) But don’t set the rent too low the IRS might say the rental home is really for your personal use. In that case, your deductions might be limited to mortgage interest and property tax, the same as if you owned a vacation home.

TAKING DEDUCTIONS.
Once you own your parents’ house, you’re entitled to reap the tax benefits of owning rental property. That includes taking write-offs for operating expenses, such as utilities, maintenance, insurance, repairs and supplies.

You can also claim depreciation deductions for the home but you can’t depreciate the cost of the property apportioned to land. So obtain an appraisal allocating the price paid between the depreciable structure and the no depreciable land.

You can use these deductions to offset the rental income received from your parents. Any allowable tax loss will phase out for people with adjusted gross incomes between $100,000 and $150,000. You can take any suspended losses when you sell the house.

Bonus benefit: Once you own the house, you can write off travel expenses you incur when visiting the house. As a result, you can secure generous deductions for your usually nondeductible trip to Mom and Dad’s for Christmas.

ENDGAME.
Eventually, your parents won’t be able to live in the house. Then, you can sell it, rent it to another tenant or move in. If you move in and make it your principal residence for a least two years, you can sell it and shelter another $250,000 to $500,000 worth of capital gains: a true tax bonanza!

CALL ON US.
This publication is issued as a service to our clients and friends. This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for a way to save taxes and avoid the IRS, call me at (702) 642-8953 or write me at isueirs@aol.com. No Exceptions. No Conditions, No Time limit. No IRS.