Help Your Retired Parents Down-size to a New Home
“If your parents are entering retirement and still living in the same huge house you grew up in, it might finally be time for them to move. Of course, this is far easier said than done—there are any number of emotional, physical, and financial challenges that come into play.
You can help your beloved progenitors deal with all of those things, but in the near term they may need help on the money part most of all. Reason: Getting a home loan as retirees with a smaller income with today’s strict lending standards is a lot different from their time, and they may struggle to get approved. And that’s where you come in!
You have several options. One is to offer them down payment assistance, but your parents would then need to qualify for the mortgage on their own, which is going to be tough if they’re no longer earning an income.
If that’s a no-go, you can either purchase a home outright and let your parents live there; co-sign to help your parents qualify for the loan; or buy a home as an investment property and charge your parents rent.
Not sure which move is right for you? Here are each option’s advantages and disadvantages.
Option 1: Purchase the home outright
- For starters, Mom and Dad will be over the moon! (Who doesn’t love a free home?) You love those guys, right?
- The home where you live will be your primary residence, and the property you purchase for your parents will count as a “vacation home.” There are significant tax benefits to this arrangement, says Lisa Cahill, CPA and co-owner of Evolve Real Estate in St. Petersburg, FL. As with your primary residence, Uncle Sam lets you deduct the mortgage interest and property taxes on the home where your parents live, up to a total of $1 million for the combined balance.
- Unless you’ve budgeted for this size of a purchase decades in advance (in which case, you truly are son or daughter of the year!), the cash you’d be spending could throw a very large wrench into your retirement savings, says Brandy Wright, a certified financial planner at Cambridge Wealth Counsel in Atlanta. “Some people buy their parents a house without taking a close look at their own long-term savings goals,” laments Wright, adding that some people dip into their own 401(k) or IRA to purchase the property.
- If you gift the property to your parents, you may have to pay a gift tax. However, the government allows each individual to gift up to $5.34 million over the course of their lifetime before paying a gift tax. (That’s a high ceiling for the average consumer.) A better option: Keep the title of the house in your name, and avoid the gift tax entirely.”
For more options read the full article at realtor.com.