“Ask Your Attorney” Column

About Buying Your Parents’ Home And Renting It Back To Them

Dear Counselor: My parents are retired, and need some supplemental funds to live on. They no longer use any of the typical homeownership tax breaks, but don’t really want to move out of their home. Even if they wanted to sell, it would be difficult to find a buyer. Any ideas?

Dear Client: You and your parents could consider a purchase and leaseback situation in which you buy your parents’ home and then rent it back to them at the “going rate”. This will put cash in their pockets, without having to refinance, or take out a home equity loan. And, it gives the family time to let the real estate market stabilize — rather than forcing a sale now to a third party when the market is down. I’ve advised other families in similar situations to have a fair market appraisal, to avoid the IRS charging that the price was too low and that there was a gift to you involved in the transaction. As far as a lease, you should charge, and your parents should pay, a fair rental value — however, the IRS does allow for a 20% discount when renting to your relatives. Once you own the home, you can legitimately take write-offs for expenses, such as utilities, maintenance, insurance, repairs and supplies, and you can also claim depreciation deductions for the value of the home itself (not the land). Your deductions will offset the rental income. And, in the end, your parents will move out and you can sell it, rent it to another tenant, or you can move in! If you move in and make it your principal residence for the prescribed period, you can then sell it and under the current tax code, “shelter” any capital gains!

Could be a good answer for your family!

John L. Maier, Jr.
[email protected]

Sweet & Maier, S.C., Attorneys
114 Church St. Elkhorn, Wisconsin