While it’s fairly common for parents to provide down payment assistance or other financial help so their adult children can buy a house, eventually some adults decide it’s time for the aid to go in the other direction. Buying a home for your parents and securing some assistance with daily tasks is complicated by financial, tax and legal considerations, but it can be an excellent solution to the dilemma of caring for them.
Where Do Your Parents Want to Live?
One of the first questions must be answered by your parents. If their preference is to stay in their current home or at least in the same area, and that’s not near you or in a neighborhood where you want to own a home, buying a home for your parents make not make sense. There are other ways to help them aside from buying a home. If they are amenable to moving, then you should consult a lender to discuss your options for financing the purchase.
Financing a Home for Your Parents
If you already own a home and you’re buying a home for your parents in your name for them to live in without you, a lender will view this as an investment property or second home. Investment properties and second homes typically require a higher down payment of 20% to 25% and good to excellent credit. Under Qualified Mortgage rules, your maximum debt-to-income ratio–including the minimum payment on all debts and the housing payments on your first and second home–must be 43% or less. So, it’s important to make this calculation and consult a lender before promising that you can buy a home for your parents. If you are having trouble meeting the debt-to-income ratio requirement, it may be best to make a larger down payment with assistance from your siblings (if you have them) or from your parents’ assets. Investment properties have different tax considerations from your primary residence, so you should also consult a tax expert so that you understand what your deductions will be. Don’t forget to calculate the other costs of homeownership, such as homeowner-association or condo-association dues, property taxes, homeowners insurance, utilities and maintenance. It’s crucial to have an open and honest conversation with your parents about their finances so you know if the entire cost of the home will be yours or if you can rely on them to cover some costs.
Holding Title to Your Parents’ Home
Even if your parents can contribute to the expenses of buying and maintaining a home, it’s typically best to avoid having their names on the title as co-owners or on the loan as co-borrowers. If your parents would ever need to apply for Medicaid to pay for the cost of assisted living or a nursing home, the home would be considered their asset and could disqualify them from receiving Medicaid.
Depending on your individual financial circumstances and your parents’ circumstances, you may want to charge them rent to offset the cost of the home. Keep in mind charging them fair market value rent shifts the property in the eyes of the IRS from a second home or vacation home status to an investment property. Therefore, you can deduct more of the home’s expenses on your taxes. Consult a tax advisor to determine the merits of charging rent.
Property Inheritance Plans
When you are deciding whether to buy a place for your parents you should also consider the long-term value of the house and what you will do with it when your parents no longer live there. If the home is in your name, then you can avoid paying any inheritance taxes–should you live in a state that has them. You can keep the property as an investment or sell it, either of which will generate income for you.
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