First Home Purchase: Home for my aging folks?

July 11, 2018 4:02 PM

My parents and I all live and work in Expensive Area that shows no sign of real estate plateau. My parents are considering relocating to Quieter, Cheaper Area a few hours away once they retire in a few years. It's unlikely they'll have resources to do that without selling their current home. How do I buy them a house there?

I don't currently own a home, and won't be able to buy in Expensive Area (where I plan to continue working for the foreseeable future). I could afford something nice and retiree-friendly in Quieter, Cheaper Area. Am considering offering to buy a home for my parents to live in, and then taking over their current home from them (so that I have a home and they still have a "home base" for when they want to come back to civilization.

Is this a thing? Professor Google is giving me tons of information about how I can buy a "second home" and rent it to my parents...but this isn't exactly my situation as I currently own nothing.

posted by assenav to Health & Fitness (14 answers total)

I would suggest meeting with a financial planner and a realtor, who will have complementary advice on these issues. There are tax implications here you may not be aware of.
posted by suelac at 4:41 PM on July 11, 2018 [2 favorites]

Is there any way of making an apartment in your parents' current house so that you could live in it? Or adding on to their house somehow? Or could their house be sold and the money used to buy a two-family house? What are their reasons for wanting to move to cheaper town other than it's quieter and cheaper? Do they have family and friends there? If they don't, it might not be a very good idea.

It could also be a headache for you to supervise repairs/maintenance on a house that's a few hours away, which is why renting might be a better option, but I understand the desire to own one's home.

Do you have any siblings who might have a say in all this?
posted by mareli at 4:55 PM on July 11, 2018

Think through how this strategy is "all our housing resources together to meet all our needs". If you can't afford your parent's current house on the open market, then the house you could buy them elsewhere is probably significantly smaller than the house they could buy with the proceeds of their current house. So there's some of you buying them a house, and some of them giving you a house. Which is why you need not only a lawyer and an accountant, but to be sure *they* want to do this.

Also, do you have siblings?
posted by clew at 4:56 PM on July 11, 2018 [1 favorite]

Best answer: Begin paying them rent at their house in Expensive Area from them at a rate that allows them to pay a mortgage in Quieter Area. Assist them with a downpayment on a house in Quiet Area -- their rental income from their house in Expensive Area will be their proof they can pay the mortgage on a new home in Quiet Area. Everyone wins!
posted by erst at 5:11 PM on July 11, 2018 [1 favorite]

Response by poster: No siblings, and their desire to leave the area after retirement has been a long-term goal. They want to be leave the city, as most of their friends and family already have.

They could actually afford a larger home in their desired area if they sold this one, but the goal is to avoid that and be able to retain the property here. Properties in their neighborhood are being sold for $800K, then razed and rebuilt into $2M homes, so it is a last resort to sell as they will have no hope of breaking back into the housing market here if they want or need to return.

I had considered helping them make the house ready to rent on the open market, but the downpayment is an issue. Helping them with a downpayment, and then renting this house from them myself to give them an income for their mortgage qualification, seems to be the most winning solution at this point.
posted by assenav at 5:39 PM on July 11, 2018 [2 favorites]

The term Rentvesting might turn up some info. Not sure if that terms made it to the US, but it's a thing in Australia.
posted by kjs4 at 6:04 PM on July 11, 2018

I'm generally skeptical of the often-default "ask an advisor," but this is complicated enough that you need advice, large enough to be worth it, and limited enough that you should only need a few hours of a financial advisor's or real estate attorney's time.

They could sell or rent it to you, or sell or rent it to someone else. Then they could buy or rent in the new location. Add in the possibility of your lending or giving them money, them borrowing against the house if they keep it, or withdrawing money from retirement accounts and then having the house as back up assets, and the tax consequences of any of those combinations, and it should be clear that a consultation is sensible.

Talk with your parents in advance and write out your combined goals. You want to pay for expertise, not for someone to facilitate communication between you and your parents.
posted by Mr.Know-it-some at 6:56 PM on July 11, 2018 [1 favorite]

Best answer: I think there is a way to make this work sensibly, but I second consulting a financial planner -- specifically someone who specializes in advising around retirement and elder-care issues. It sounds like your parents have a lot of equity in their existing home and are still working and doing well, but any time you are contemplating an in-family transfer of significant property away from someone at or approaching retirement age, you will want to consider the implications on the less pleasant post-work scenarios, like their eventually being able to buy in to assisted living if one or both can no longer live independently, Medicaid eligibility lookback periods if catastrophe strikes, etc.
posted by LadyInWaiting at 7:00 PM on July 11, 2018 [3 favorites]

In my neck of the woods, if your parents own their current place outright at $800k, and want to buy in new place at $300k, they could mortgage current home for $300k, use that money to buy new place, and then pay the mortgage from the rent. The repayments on $300k @5% 30yrs are around $1610pm. There will, of course, be tax implications which may or may not benefit them. No deposit is required because the $500k equity in the now-mortgaged parents' old home is the deposit.
posted by Thella at 7:41 PM on July 11, 2018 [2 favorites]

Best answer: I'm going to go ahead and assume that we are talking about property in California. If that is the case, please DO NOT BUY the property from your parents, nor should you be added to the title. Any sort of change of ownership will trigger a reassessment of the property, which could potentially raise the annual property taxes due by thousands.

If your parents really do intend to keep the property, with the intention of someday willing it to you, you will be eligible at that time for a parent-to-child transfer of the property, which maintains the base year value, and which allows you to continue paying property taxes at the rate/value that it was originally purchased at. This is the major thing that new purchasers hate about Prop 13, but which allows those of us who are California natives to actually remain in California without Silicon Bay/Beach money.

Whatever you do, talk to a tax professional AND THEN VERIFY with your local County Assessor before you do any kind of paperwork / contracts / legal changes. Trust me, trust me, trust me when I tell you that most tax professionals, though they may be superstars when dealing with the IRS, are not that savvy when it comes to local County property taxes, and that bad professional advice can have long-lasting negative affects with very little to no legal remedy.
posted by vignettist at 8:15 PM on July 11, 2018 [10 favorites]

It will be useful to figure out these amounts:
Your parents have equity in their current home in the amount of market value - existing principal on mortgage = $___ Realtors will give you a free valuation; likely to be in the ballpark.
You have equity (savings) of $___
Market Rent of Parental house = $___

In the scenario you propose, your parents are effectively being generous, as you benefit from the equity in their home, paying market rent on a smaller home in a desirable neighborhood, but they have a theoretical opportunity cost* of $___. This is what they could make on the sale of their house, which they could invest in a new house, or investments that return cash for their retirement needs.

There are options here. Is there enough land to build a 2nd house on the property so you could be there with them? or expand the house into 2 units? Are they sure they want to move to a smaller town, farther from you, and perhaps with many fewer cultural and other options?

With so much equity in their house, they could take out a mortgage/ re-finance existing mortgage, purchase desired home in cheaper area, rent existing home to you. This seems the most straightforward. I think you want to be fair to them, and it's making it more complicated.

One thing to watch out for is that the IRS imposes a tax on gifts. If, for instance, you bought their house at below market value, the IRS could tax the difference as a gift. IANAL, talk to an expert.

Opportunity cost - the loss of potential gain from other alternatives when one alternative is chosen.
posted by theora55 at 8:18 PM on July 11, 2018

... renting this house from them myself to give them an income for their mortgage qualification, seems to be the most winning solution at this point.

Be aware of the tax implications of renting from relatives, particularly at a below-market rate. Here are some IRS links, but please consult a professional.
posted by Iris Gambol at 10:56 AM on July 12, 2018

It sounds like you may also want to create a family trust where all property (old home and new retirement home) are registered. This can help tremendously with eventual inheritance after your parents pass - and it can preserve the current house's assesments and prevent a costly transfer of ownership later. Legal help with an expert who also knows the financial planning aspects can be invaluable here.
posted by quince at 2:41 PM on July 12, 2018 [1 favorite]

Yeah, again, if you are an only child you are not looking at any sort of costly transfer of ownership later, and a trust does not protect the assessed value (it can however eff up the assessed value later if you don't get the property removed from the trust within 90 days of your parents passing). Again, talk to whatever legal and financial advisor you need to, but then VERIFY with your local Assessor before doing anything.
posted by vignettist at 12:28 AM on July 14, 2018