Magazine article Supervisory Management

Housing Strategies for Your Elderly Parent

Magazine article Supervisory Management

Housing Strategies for Your Elderly Parent

Article excerpt

Housing Strategies for Your Elderly Parent

Millions of elderly Americans are "house-rich, but cash-poor." How about your parents? Do they live in valuable homes but not have enough money for everyday expenses? If so, you are probably covering some of their expenses, something that can be demeaning for them and uncomfortable for you. This need not be the case. There are innovative ways that your parents can take advantage of the equity in their homes without jeopardizing the roof over their heads.

Sale-leaseback agreements

With a sale-leaseback arrangement, you buy your parents' house and lease it back to them for life. If your parents are 55 or older, they won't have to pay federal income tax on profits from the sale--up to $125,000. The house stays in the family and helps relieve your parents' anxiety about their future. If your total income is less than $150,000, ownership of the house provides you with all the benefits of rental property: deductions for interest expense, property taxes, depreciation, and maintenace costs. Further down the road you may also profit if there is appreciation in the market value of the house.

Here's how it works. Let's say that your parent's current income is very tight, but they own a $100,000 house free and clear. You buy the house with a $10,000 down payment, and your parents finance the rest by providing you with a $90,000, 10-year amortizing mortgage at ten percent interest. As part of the arrangement, your parents sign a lease granting them the right to rent the house for as long as they live.

During the term of the agreement, your mortgage payments of $1,190 per month to your parents should enable them to pay the rent and leave extra cash for expenses. With the proceeds from the down payment, they could buy a deferred annuity that would begin payment in ten years (when your mortgage payments are through) and provide them with supplementary income for life.

Even though sale-leasebacks are a family affair, they are not simple to arrange. These complex transactions require a lawyer who has experience with real estate sales and rentals and mortgage and annuity contracts. In addition, for you to reap any tax benefits, the IRS requires that you charge your parents a rent that is comparable to similar houses in the neighborhood.

Sale-leasebacks have drawbacks as well as benefits. The loss of home ownership may affect your parents' status if, for example, one of them ever has to enter a nursing home. That's because a house is an exempt asset when applying for Medicaid coverage while the note receivable is not.

Reverse mortgages

Your parents might also consider a reverse mortgage, an increasingly popular type of home equity conversion designed for the elderly. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.