Purchasing home from your parent

ppphamSeptember 7, 2012

I lived in NC USA. The questions I have for all experts out there is - what is the least costly way to go about purchasing the house from your parent meaning I don't want to take over the payment, I just wanted to pay cash for it and hold on the the title. Thanks,

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lyfia

Use a title company to draw up the paperwork and handle the transfer. At least that is what would be least costly in TX based on my experience. Could be different in NC.

Why not call around to find out. Real Estate Attorneys or title companies would be my starting point.

    Bookmark   September 7, 2012 at 9:43AM
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brickeyee

If you wait to receive it from the estate you get a stepped up cost basis since the estate pays any taxes due.

Talk with an attorney familiar with RE, inheritance, and elder law.

If you purchase now there may be taxes due from the seller to the feds/state/local depending on the value and how long they have owned and lived there.

    Bookmark   September 7, 2012 at 12:33PM
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liriodendron

The other issue is the price you may pay.

Here's a scenario: Suppose you buy it at price that your generous parents think is OK, but maybe it's not a full appraised value. Not a bad deal (except that as Brickeye noted above you are screwing yourself out of a substantial tax break that would come to you as a result of inheriting the property and your parents may have to pay some taxes that would be avoided by transfer after death). But anyway, to get back to my example where your parents don't sell you the property for at least the well-documented, fair market value at the time. Then if they have reverses in health and finances and need to qualify for MedicAID (not Medicare, that's something different) to cover long term care in a nursing home, there is a look-back provision that hunts for intra-familiy wealth transfers done - even unintentionally at the time - to avoid paying for the care. That could disqualify them from much-needed assistance, or require you to reimburse the system for the difference.

Not knowing why you want to buy the house - perhaps you just want to and your parents would otherwise want to sell it anyway - makes it hard to give the necessary tax, inheritance and financial advice.

One other thing, if the proposed plan you suggest boosts your parents' income up due to capital gains on the sale, that could affect their Medicare premiums for that year.

Also your siblings, if you have them, may need to be consulted to preserve family peace, if not to immunize against later inheritance disputes.

It would be well worth your while to pay for professional advice where you can get answers that match your particular circumstances.

HTH

L.

    Bookmark   September 7, 2012 at 4:42PM
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jkom51

Quite aside from the Medicare lookback provision mentioned above, the IRS has some fairly strict rules to follow when sales are negotiated between family members. I've attached a link that gives a better explanation that might help clarify what you need to have in case the IRS questions the sale:

Here is a link that might be useful: Bankrate.com answer to

    Bookmark   September 7, 2012 at 6:02PM
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pppham

Thank you so much for the advices. I didn't realize all of the laws involved with the purchase. Thought, I just walked in the bank pay for it, get the title and be done with it. A lots of good questions that will help me to find the right attorney.

Liriodendron, here is my situation - Both of my parent are currently retired (10 yrs now). The house that I want to purchase was their rental home and not their primary house. The house still has xxx$$$ that they owed the bank.

Thanks again.

    Bookmark   September 10, 2012 at 8:06AM
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loves2read

Get a CPA familiar with tax and estate issues to look at the situation

    Bookmark   September 10, 2012 at 9:54AM
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liriodendron

If you think that you can just go to the bank and pay the outstanding amount on the note and get the title, you are forgetting that your parents probably retain some equity interest in the property. Paying off the note is not the same as becoming the owner.

Your parents might be underwater with the mortgage, so w/o any "equity" at the moment, but get that documented to avoid MedicAID look-back issues.

However since you have added that this is rental property - and presumably they have been using the tax schedules for that - it makes the question much more complex.

Definitely you need an accountant who is familiar with how your family has been reporting the income and expenses on this property over the years. There are also be income tax consequences that may be due on sale of rental property.

Get thee to a professional's office, before you go any further so you can understand all that is in play in your situation.

HTH,
L.

    Bookmark   September 10, 2012 at 1:01PM
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pppham

Way too complicated! Agreed, I will seek professional help. Thanks again.

    Bookmark   September 10, 2012 at 1:04PM
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