Buying Your Parents House: Is It A Smart Financial Move?

Wouldn’t it be perfect if your parents could simply give you their home? Unfortunately, this isn’t always possible.

Maybe both mom and dad have been struck down by illness and cannot contribute financially to the household.

Perhaps they’re going through a tough patch financially that has stopped them from keeping up with their mortgage payments and might risk penalties or higher mortgage interest rates.

There are a lot of situations where buying your parents house might be required, most of which you have likely never even considered. In this piece, we’ll discuss some of the most typical questions people have in considering the purchase of their parents’ home and provide some creative ways to buy your parents’ house.

Why People Buy Their Parents’ Home

Parents Are Downsizing

After reaching the half-century mark, many individuals begin to consider the merits of downsizing. It’s possible that maintaining a big house after retirement may be too taxing on both finances and stamina. With lower costs, retirees may have more disposable income. They may also find that a smaller house is simpler to manage as they age.

As a means of gaining financial independence and relieving the stresses associated with a big home, 51% of retirees have reported downsizing. However, relocating isn’t their only option when it comes to downsizing their living arrangements. The freedom that comes with a downsized lifestyle may be a welcome boon in their elderly years.

Parents Need The Cash

Healthcare is one of the many unexpected costs that retirees face. And for most people, their house is their biggest source of financial security. A home’s equity may be quite useful in old age. A reverse mortgage is one option to transfer money out of the house, but it might leave the bank as the property owner passes away.

Reverse mortgages allow homeowners 62 and above to utilize their home’s equity as security for a loan. When a reverse mortgage loan is approved, the homeowner receives a cash payout based on the home’s equity. The payout structure might vary from month-to-month payments to a flat amount.

Protect The Home Equity

In many states, your parents’ home equity is fair game in a lawsuit, especially if they are nearing or have reached the point of being debt-free. Adult children frequently hesitate to revoke their parents’ driving rights out of worry for their safety, but it’s essential to keep in mind that their parents’ chance of being involved in a vehicle accident increases the longer they continue to drive.

Parents Aren’t Using The Home Tax Breaks

Let’s say your folks are getting on in years and need a helping hand financially. Despite no longer qualifying for standard homeowner tax benefits, they have no plans to leave their current residence. Unfortunately, finding a buyer would be complicated, even if they were serious about selling.

If you rent the house out to your parents, you’ll be eligible for all the usual tax benefits and deductions for landlords. It would help if you thought about your financial situation and potential investment property, but there may be considerable rewards.

Parents Want To Help You

Families may have more wiggle room in terms of pricing. As an example, parents may give their children a piece of the equity they get from the sale of the property by selling it for a little less than market value.

If your parents have built up equity in their house, they may choose to “gift” you some of that value so that you may utilize it as part of your down payment.

If your mortgage lender has a minimum credit score and down payment requirement, this might help you get there. The standard down payment to avoid mortgage insurance is 20% of the home’s sale price.

You won’t need to save up for a down payment if you’re gifted some of the property’s equity. Further, gifts of equity are treated the same as cash gifts by the majority of lenders.

To warn you, however, too drastic a price cut on your parents’ part can send warning signals. The IRS may classify the transaction as a taxable gift if the selling price is too low. At present, individuals may give away up to $15,000 in equity annually tax-free, while married couples can give away up to $30,000. You may consult a tax professional to be sure about paying taxes.

Save Them From The Home Upkeep

One of the highest hidden costs in old age is maintaining one’s primary residence. There is usually not much bandwidth for unexpected expenses on a fixed income. Your parents might appreciate it if you buy their house and take over the upkeep.

You may question the benefits of buying your parent’s house and renting it back to them? Purchasing a property from a parent has several advantages. For one, you are in a prime position to know intimately about the home’s upgrades, maintenance, and upkeep since you have seen it all firsthand.

After the home purchase, however, it is certain that some major maintenance items, such as appliance replacement or repair to a mechanical system, will arise. Neither you nor your parents want to wind up feeling bad about the situation. Prepare yourself for the possibility of having to do repairs in an emergency by having a backup plan in place. In other words, plan for the worse. 

An inspection before buying any home is brilliant since it will reveal any hidden problems. Home inspections are performed so you can see the condition of your home’s systems up close and personal. Knowing what’s going on with the home from the basement all the way up to the attic is especially crucial if your parents are old or incapacitated and may not have been able to keep up with routine upkeep.

Should You Buy Your Parents’ House?

To put it briefly, you may buy your parents out of their house and rent it back to them. To ensure that all parties involved in the transaction come out ahead, do your homework and seek out expert advice.

The primary advantage of buying a home for parents is that it relieves them of their mortgage payment and other financial obligations. However, there are tax consequences for buying your parents’ house. For instance, the government may require your parents to pay capital gains tax.

Ask yourself, in all candor, whether your relationship with your parents is robust enough to weather any possible conflicts or fights that may emerge if you purchase their home. 

In a similar vein, if you have siblings, you will also need to assess your connection with each of them carefully. You might be paving the way for a difficult journey if any of them feel they have been taken advantage of or excluded.

What About Renting Back Your Parents’ Home?

One method to help your parents out if they can’t afford to stay in their present house is to take them on as a tenant.

If your parents have money problems, you may purchase your parents’ home and rent it back to them.

With this strategy, you may generate rental income with the peace of mind that comes with renting to renters who are committed to staying for the long term.

If you want to rent the property to them at a price below market value, you should seek out competent legal counsel. Some lenders won’t accept this sort of purchase agreement, so you’ll need to be upfront about it throughout the buying process.

Steps To Buying Your Parents’ Home

The home buying process is simple, but due to the fact this is considered a “non-arm’s length transaction,” you will want to make sure you do follow the process and seek expert advice to avoid any complications with the IRS.

  1. Set a mutually acceptable price, ideally one close to fair-market-value;
  2. Talk to your siblings and other family members who could have a stake in this. All dealings must be honest and open;
  3. If you are looking to buy your parents’ house for what they owe, several choices are available to you. You can ask the current lender to transfer the home loan to you, or your parents may apply for a mortgage in your name;
  4. Make use of a lawyer. Even though you won’t need a real estate agent, having a real estate attorney overseeing the deal is still a good idea; and
  5. Close.

Should You Buy Your Parent’s House

It’s essential to keep your emotions in check. Even if most children only buy their parents’ house out of attachment to the home, they should look at the numbers to see whether it’s a smart financial move.

Keep in mind that your parents will outgrow the home at some point. After that, you have the choice of moving in, renting it out, or selling it, perhaps to a cash home buyer.

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