My mother moved from her house to an apartment in 2014 and started using the house as a rental property. He bought it with my dad in the 60’s and he bought some from her after their divorce in the 70’s. I don’t know if I have any cost documentation, but I think they basically bought the house for ,000 30,000. It costs about 0 230,000 today.
In 2020, my mother moved to a supportive lifestyle, so her expenses increased. He now earns about 35 35,000 a year. Looking at my mom’s money, I guess she’ll probably spend all her savings by 2032 and sell the house to cover her personal expenses. I wonder if we can do something now if the homeowner can reduce the capital gain if he keeps his savings. He is only 76 now, but his average health is low. Now that he has moved on to a supportive lifestyle, he is doing much better. Determining whether he will survive until 2032 is difficult for me, but it seems very possible.
Do you have any suggestions for reducing the tax on home sales or when to sell? If he gives us a house, even if we sell it, we will still have a capital gain. Are there other ways to add to her savings using the house? I think vacation rentals can bring in more income, but the house is not a great neighborhood for that (and we need to decorate the house). Can he get a home equity line of credit and invest the money? If he sells the house to make a living, will he be able to get a tax credit? Can he get tax credit today to reduce his income tax from rental income?
While this may not work for my mom, I wonder about this idea. Is there a way to divide a house and sell individual parts on your own schedule? I don’t know if there is any benefit for him other than to spread his capital year after year for profit, but I am curious if it is possible. Does he have to make a deal with a company that has this kind of funding or can we set up something ourselves and sell the shares to ourselves and others? Would it be really hard to sell later if you have more than one owner?
‘The Big Move’ is a marketwatch column that looks at the inside and outside of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have questions about buying or selling a home? Do you want to know where your next step should be? Email Jacob Pass at TheBigMove@marketwatch.com.
For people with older parents, navigating the complex web of their resources and figuring out how to meet the costs associated with long-term care can be an important challenge. I’m glad to see that you’re asking these questions and planning right now, until all of her savings to deal with this important issue are exhausted.
In fact, we should all think about our ultimate long-term care needs. The study found that only five Americans over the age of 55 would not need long-term care, with a quarter of retirees “in dire need” of this assistance.
You’ve asked a bunch of important questions, so I’d like to address each one individually. To get started: You should think about the capital gains tax involved in the sale of your mother’s former home. When he converted it to rent a few years ago, the house became an investment property as opposed to his initial residence. As a result, if they sell the home they were living in (for at least two of the last five years), they will not qualify for exclusion. Sale of a home for a single filer (based on the original purchase price), or $ 500,000 for a jointly filed married couple.
For this reason, you should do what you can now to keep an ongoing account of your parent’s investment in the home, from the cost of any improvement to the ongoing maintenance of the home. These repair costs and improvements can be deducted from last sales revenue to reduce the taxable amount.
“The capital gain exception does not apply to homes that were held as investment property.”
If your primary goal is to avoid seeing your mom invest in a home adopted by the IRS, you may want to consider 1031 exchange. Under the tax code, investors can avoid capital-gain tax on the sale of homes if the funds are reinvested in the same property. To take advantage of this gap, you must follow certain rules – for example, you must complete the purchase of a new property within 180 days of the sale of the original property.
If you decide to use an investment property for your mom’s long-term care, going this route can be effective. You mentioned that the area in which he lives is not ideal for vacation rent-and I assume that the income he receives from his current tenants is not sufficient for his support খরচ living expenses and home maintenance. So maybe you can sell the family home and then reinvest the income into a rental property that will create a better return.
Another option similar to what you described at the end of your letter would be an installment sale. According to Concanon Miller, an accounting firm based in Pennsylvania and Florida, the transaction “makes the buyer pay the seller over time without transferring a single amount at the time of completion.” These payments may be determined by the terms of a deed, contract or mortgage. This method can allow the seller to reduce or defer their tax liability for sales income by spreading it over many years.
In the end though, my advice would be to work with a lawyer, financial planner or accountant who specializes in caring for the elderly. Of course, you can finally get a home equity line of credit to pay for his care. But it is still a loan that you will eventually have to pay monthly – not to mention the interest payments and fees involved.
Your mother may eventually have to rely on Medicaid to finance her long-term care, especially if she has not purchased insurance. Medicaid will allow a retiree to own a home and receive benefits, but in the end, if he or she moves into a full-fledged nursing home, it can claim a right over the home. He may want to keep the house in an unalterable Medicaid trust.
“A Medicaid Asset Protection Trust can protect the assets of a retiree and enable them to qualify for assistance in the cost of long-term care.”
As the American Council on Aging explains, “These trusts prevent Medicaid applicants’ assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise become ineligible for Medicaid to receive Medicaid and receive the care they need at home or in a nursing home.”
Homes placed in the trust can still be sold and after passing on to the heirs they will take the same tax action as usual. Although timing is key: Medicaid’s rules vary from state to state, Medicaid typically assigns a five-year “look-back” period and may violate the eligibility rules by establishing a trust within your mother’s five years to qualify for assistance.
A veteran law attorney or financial expert can follow the steps to help you choose which of these paths to take. Also, they may advise you that your mother may be able to sue for living tax assistance with regard to any tax deductions. While the process may seem daunting, getting started now is the right thing to do. I wish you and your mom the best of luck in navigating these choices.
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