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How To Buy Your Parents House And Rent It Back To Them

By Jason Markum

With the massive recession of 2008 to 2009 in full swing, credit markets have dried up. Because of this, many of us have had to resort to creative forms of financing, one of which is the classic transaction known as a sale-leaseback. You can create fairly decent amounts of income and estate tax savings if you buy your parents house and then rent it back to them.

These sort of arrangements allow for tax deductions for your parents if they are over 55 years old. If so, tax law will allow them to exclude up to $125,000 in profit from the sale of the house.

There are many advantages of a sale-leaseback arrangement.

The first advantage is that future appreciation from the house isn’t included in your parents estate any longer. This can be a fairly large tax break, right off the bat.

The next advantage is one for the person who buys the house… namely you. By owning your parents house you can shelter some of your own income by deducting the expense of owning the house as will the upkeep and the depreciation on the house.

The next advantage is for your parents; it’s a very straightforward one in that they simply receive cash in exchange for the equity that they’ve built up in their house. Think of it as taking out a home-equity loan that they don’t ever have to pay back.

The next advantage is one that I mentioned earlier, and that is that your parents will get a one-time $125,000 tax exclusion on the gain they receive to sell the house to you.

The next advantage is slightly less tangible but it is the fact that your parents will enjoy the advantages of renting. They won’t have to necessarily take care of the maintenance and upkeep anymore, that will be your responsibility from now on. At the same time, they get to enjoy living in the same house that they are used to.

A sale-leaseback might make especially good sense if your parents are elderly and have trouble supporting themselves. If you are already paying for their support, this may be an attractive way to continue supporting them at a tax advantage.

And it’s a way for your aging parents to save a little face because they won’t be simply taking handouts from you for support, they will be selling you their house which you will eventually be able to sell once they’re gone.

There are several technicalities that need to be upheld in order to create a valid sale-leaseback arrangement. For instance, the house has to be purchased at fair market value, and your parents must sign an actual lease. It must be clear that your parents don’t plan to buy back the property from you in the future, and it also must be clear that your parents no longer maintain control over the house.

Before entering into one of these arrangements be sure to run it by your local accountant or CPA to make sure you’ve crossed all the T.’s and dotted all the i’s.

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