Help Parents and Save Tax

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As your parents grow older, they may require some financial assistance themselves. Often all they need is a bit more current income. You would probably like to help them but want to do so at the least cost to yourself. A variety of techniques may allow you to obtain some tax benefit from the help that you provide. Parents often must live on a relatively modest retirement income. At the same time, they may own their own home out­right (without a mortgage). While they could either sell the house or take out a mortgage on it, either of these transact ions adds to their living costs (rent or mortgage pay­ments) . They would probably prefer to extract some of their investment in their home while continuing to live in it ei­ther rent-free or at a modest rent. You would probably like to help them do this while saving on your own taxes. A relatively simple transaction can allow you to accomplish these twin goals. Purchasing your parents' home The specifics can vary from case to case, but the transac­tion would generally work as follows: Your parent's house is transferred to your name. A mortgage would be secured equal to about half the appraisal value (the percentage could vary) of the property. You would assume the obligation to make the mortgage payments. In exchange for giving you title to their house, your parents would receive the mortgage pro­ceeds plus the right to live in the house rent-free for the rest of their lives (plus an option to sell this right back to you should they decide to live elsewhere). You would as­sume the obligation to pay the mortgage and property taxes. Your parents would continue to be responsible for insurance and upkeep of the property as long as they lived in the house. Your parents could then use the mortgage money to purchase an annuity. Such an annuity would provide them with additional income for the remainder of their lives. Since a portion of the an­nuity payment is return of principal and since they probably have relatively little other taxable income, the tax on this annuity income would be modest. The transfer of the house into your name can possibly be structured so that little or no income or gift tax liability is incurred by either you or your parents. Your parents have a one-time right to sell their home without paying tax on the gain. To do so they must be at least 55 and have occu­pied the house as their principal residence for at least three out of the past five years, and the gain must be less than $125,000. That portion of the gain exceeding $125,000 is taxable. No gift tax would be due as long as the value of the mortgage proceeds plus the right to remain living on the property rent - free is approximately equal to the house's fair market value. If, however, the property's value exceeds the value received by your parents, that portion exceeding $10,000 could be subject to the gift tax. Even this liability could be avoid­ed by spreading the transfer over several years. Your investment produces substantial rewards By purchasing your parents' home, your tax savings should be substantial. Assuming you don't already own a second home, the interest is fully deductible against your own income. The property tax is deductible regardless of how many houses you own. Thus a substantial fraction of the house payments would be deductible and reduce your tax liability by as much as 28 percent of the dollar amount of the deduction. Also don't forget that you have acquired ownership of the house and will have full rights to it upon your parents' death. The proceeds you realize when you sell it may equal or exceed the amount of your mortgage and property tax pay­ments (including interest). Had this transaction not taken place, your parents might well have had to sell their house anyway and then have used up the money from the sale to pay rent and other expenses. This type of transaction not only helps your parents maintain their lifestyle and saves you taxes but may also help protect your inheritance.