Buying House from Parent

graywings123February 15, 2009

During yet another sleepless night, my husband came up with the following idea and asked me to post it here to get opinions.

His 83 year old mother is mentally sound but financially irresponsible. He is gradually taking over her finances with her agreement. She is currently paying off two debts totaling $52,000, one is a home equity loan and one is a credit card bill. Payment on these two debts total $900 per month. After she pays these bills and her monthly expenses, she has about $450 to live on.

He will inherit her house when she dies. He came up with the idea of buying the house from her now for about $75,000, enough to pay off her debt, cover the closing costs, and set aside $12k, possibly for a car for her. He would then charge her about $400 rent to live in the house(enough to pay his mortgage on the house), leaving her with an extra $500 per month to live on.

There is a lot of wiggle room on all the numbers depending on interest rates and closing costs. The question here is more about the concept of what amounts to a within-the-family reverse mortgage.

I believe there are disadvantages to him because he would fare better in inheriting the house, but that isnÂt the issue for him right now. She is in good health, and we expect her to live into her 90Âs. The house is not in great shape, and with the current real estate market, an appraisal of $75,000 would not be out-of-line.

Neither of them want to consider a true reverse mortgage.

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I don't think he'd fare better inhereting the house. I think it would be a wash from a tax perspective.

If he inherits the house his basis will be adjusted to FMV at the date of death. If he purchases now for FMV then his basis would be the same.

Any gain she would get on the sale of the house woudln't be taxed as there is a 250K exemption on profits from the sale of owner occupied houses.

Now financially.... thats up for them to decide. Theoretically, its just a shift of cash from the son (through a mortgage) to the parent, which she will spend to live on. It is a reversse mortgage in a sense with the Son being the mortgage holder.

at death he's still stuck selling the house, now he just owes close to 100% of the value and needs to get that to break even, or else it will cost him money out of pocket.

    Bookmark   February 15, 2009 at 9:22AM
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Make sure to get a professional appraisal (not just a realtors CMA) when you establish the sale price. If you vastly under value it that could trigger gift tax issues later on. And in order to preserve your MIL's possible eligibility for Medicaid, the transaction can't look like it was done just to strip out assets. I'd consult an elder law lawyer before embarking on this, too.

Also if your and your Dh buy this house with a mortgage that debt will count as part of your debt-to-income calculations on all further loan/credit card apps. Something to think about should your personal situation change.

Another thing to think about is how this will sit with any other potential heirs (your husband' sibs, for instance).


    Bookmark   February 16, 2009 at 12:01AM
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With the New Tax laws & Medicaid rules I would definitely recommend contacting an Enrolled Agent or a CPA with this question. I consulted a Tax lawyer, CPA, JD. myself because I was not up on the law. It must be done at at "arms length" for FMV otherwise you will trigger Gift Tax rules. Medicaid rules now are concerned with people who shift assets within a 5 year period of people using their benefits. [It seems like the purpose in our tax code is to make our parents die penniless or dependent on their children for survival. Either that or they are extremely rich. No middle ground anymore! JMHO ]

    Bookmark   February 16, 2009 at 3:11AM
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Your husband should also consult an attorney before proceeding. If his mother cannot handle finances, a conservatorship may be in order. In any event, he should get legal advice regarding his plans.

    Bookmark   February 16, 2009 at 6:45AM
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your MIL is a very lucky person to have two people care about her this much. If I am reading your post correctly, your MIL has a net worth of 23K, and all of this is in the house. The fact the your husband will inherit the house is not relevant - upon her death, the house will have to be sold to settle her debts, and pay for her final expenses (burial, cremation). Your huband will receive a small amount, at best, or will have to pay all these expenses (up to value of house) if he wants to keep ownership of this house.

Your MIL is of sound mind - even if you do assume all of her debts (with house as collateral), what is to prevent her from driving up her debt again? You said she was very irresponsible. A lot of this debt could be consumer debt or unforseen medical expenses. Are you willing to pay a $400 mortgage because MIL bought too much stuff on QVC on her new charge card at 18% interest?

I could ramble on and on, but I'll try to wrap it up. I would not do this. You're responsible - she's not. By helping her in this way, you are possibly hurting yourself in ways that you can't know right now. Situations change, often with little advanced warning. I would look for other ways to help her. If your husband insists, I would certainly ask help from a professional who deals with these situations.

    Bookmark   February 16, 2009 at 9:09AM
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Graywings, you really need to talk to an EXPERIENCED tax person before doing this. You need to understand the potential tax implications of buying your MIL's house. Depending on the fair market value of your MIL's house vs. the $75,000 figure you mentioned, there could be some significant tax issues.

    Bookmark   February 17, 2009 at 7:53AM
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Thanks for the responses. I don't know whether he will go forward with this or not. If he does, it is pretty clear that he needs legal advice before doing anything.

    Bookmark   February 18, 2009 at 10:11AM
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"and set aside $12k, possibly for a car for her" Or maybe for a service to drive her around. I know of someone in her 90's who gave up driving not becuase of her skills, but she realized her reaction times had slowed dealing with the other idiot drivers out there!

    Bookmark   February 18, 2009 at 10:23AM
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