jump to navigation

Tax Tip of the Week | No. 251 | Create a Tax Break – Buy Your Parents’ Home May 21, 2014

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , trackback

Tax Tip of the Week | May 21, 2014 | No. 251 | Create a Tax Break – Buy Your Parents’ Home

Editor’s note:  We ran this tip almost four years ago.  A client of ours saved this article thinking he may want to use this tip for his parents.  This past tax season he brought in the article to discuss his situation.

Do you have aging parents that live in an appreciated home, but no longer reap any tax benefits from ownership? For example: home is paid off and there is no mortgage interest deduction for them to deduct.

By buying your parents’ home, and then renting it back to them at the going market rate, they would gain instant access to their home equity (without moving) and you’d pick up some generous tax deductions.

To avoid gift-tax consequences you need to pay a fair market price for the home.  Be sure to support the purchase price with a qualified appraisal. Then, both sides should enter into a lease at a fair-market rental value. Note: tax courts have ruled that landlords can reduce the fair-market rent by 20% when renting to relatives because of the reduced maintenance and management costs.

Once that is accomplished, you would then be entitled to reap the tax benefits of owing a rental property.  This would include write-offs for mortgage interest, property taxes, utilities, maintenance, insurance, etc.  You would also be able to take a depreciation deduction based on the purchase price of the home (but not the land value). If your parents live out-of-town, you could realize a bonus benefit of deducting travel expenses for an occasional visit to inspect your rental investment!

These deductions would offset the rental income you receive from your parents.  Any allowable tax loss would begin to be phased out if your adjusted gross income exceeds $100,000.

Eventually, your parents won’t be able to live in the house any longer.  Then, you can sell it, rent to someone else, or move into it yourself.  If you move into the home and make it your principal residence for at least two years, you could then sell it and shelter another $250,000 or $500,000 in capital gains!

This is only a simplified example.   If you want to consider this tax strategy we strongly urge you to call us first.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.


no comments yet - be the first?