Allowing your mom or dad to live at home in a property you provide is a wonderful gift – a way to say thanks for all they’ve done for you, and a way to be sure that they’re safe and comfortable. If you’re thinking about buying a home for a parent, you have several options to consider. Many adult children of aging parents purchase a rental home, then loan or rent the residence to their parents for free or for a low monthly fee. Others buy the house as a second home in order to reap some great tax benefits. There are also children who help their parents get into a home by signing on a mortgage together.
If you can afford to buy a home for your parent, and are prepared to pay the mortgage for the foreseeable future, you have choices to consider. How you proceed with buying a house for a parent depends, in part, on how you’ll finance the purchase and whether you can get the loan you need.
Buying a Second Home for Your Parent
Buying a property as a second home is one popular way of getting a residence for an aging family member. Second-home mortgages for parents can be tricky since the bank will likely impose certain limitations on the deal. As an example, loans secured by Fannie Mae or Freddie Mac can require borrowers to live more than 50 miles from their first home. This might mean you can’t have mom and dad nearby if you’re financing your parents’ new residence through one of these lenders.
While second homes often come with certain restrictions, they can be a great way to house a parent from a tax perspective. On the subject of second homes, the Internal Revenue Service (IRS) allows that if “you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home.” Under this rule, your parents can stay in your second home so long as you do not charge them a fee to do so.
At tax time, a second-home owner can usually deduct mortgage interest on two residences. Owning a home for a parent can also allow for deduction of expenses such as property taxes, improvements, utilities, and maintenance. Getting a mortgage for a parent might be more practical if you consider these extra savings at tax time, but, in order to fully understand your rights and options, you should talk to a local real estate tax expert. He or she can help answer your questions about owning a second home as a residence for an elderly parent.
Buying an Investment Property for Your Parent
If you have trouble financing a second-home mortgage, it could be because the bank knows it can’t rely on rental income to help generate the payment. Trouble financing a home for a parent can force some adult children of elders to consider alternatives. When shopping for your parents’ new home, an investment property may be easiest to finance. If you buy the house as a rental, it can be as close to your own home as you wish. You can leave your parents’ names off the mortgage on this type of purchase, which may help protect their eligibility for Medicaid. Being a sole owner can also make things easier for you later if you decide to sell the home.
If you do buy an investment or rental home for your parents, keep in mind that you don’t get many tax benefits. The IRS states that “you can deduct the cost of repairs to your rental property but you cannot deduct the cost of improvements.” Furthermore, any money your parents pay as rent will be taxable. A certified public accountant can help explain what taxes you’ll owe on real estate rented to a parent.
Co-Borrowing on a Mortgage With a Parent
If you’re interested in buying a home with your parents, you have a third option: a non-occupying co-borrower loan. The U.S. Department of Housing and Urban Development (HUD) notes, in chapter two of its Mortgage Credit Guidelines, that the occupying co-borrower loan provision’s purpose “is to enable a family member to have a joint interest in a property that would enable another family member to attain principle residence homeownership.” Parents qualify as the occupants with such a loan so long as the co-borrower is “related by blood, marriage, [or] law,” or able to “document evidence of a family-type, longstanding, and substantial relationship.”
The non-occupying co-borrower provision is useful for adult children of elderly parents because it allows a borrower to have multiple Federal Housing Administration (FHA)-backed loans – in other words, it allows someone who already has an FHA-backed mortgage to buy a second home for a parent without being considered a private investor. When elderly parents can’t work and need housing, this option can allow their children to cosign on a loan in order to help meet income requirements.
Co-Borrowing and Medicaid Benefits
Before committing to homeownership between parents and children, be aware that Medicaid qualification can be jeopardized when parents sign on a new mortgage. Buying a home with an elderly parent might make sense if you’re sure they don’t or won’t qualify for Medicaid, or if they have more than enough money set aside for unexpected long-term care needs. If your elderly parent may need Medicaid later in life, it’s important to research what impact homeownership may have on future assistance. Rules vary from state to state, but there are situations in which a parent’s home can be taken by the Medicaid estate recovery program. If your parent’s name is on the deed and he or she goes into long-term care, you may lose part of your investment or your parent may lose their Medicaid benefits. The U.S. Department of Health and Human Services reports that “once the home is sold, its equity interest, based on the property’s fair market value and net sale proceeds, becomes a countable asset. In a similar fashion, the home of an institutionalized Medicaid recipient loses its exempt status once he or she no longer intends to return home, and the homeowner’s equity interest becomes a countable asset.” This risk should be weighed against the potential benefits of homeownership between parents and children, and the situation can be discussed with a knowledgeable real estate lawyer.
When buying a home for a parent, you need to weigh the advantages of buying it as an income property against those of buying it as a second home. The former may be easier to finance, but the latter offers tax advantages that may help you manage the cost of housing a parent. No matter how you finance your elders’ new residence, providing a home for your parents can be a practical move as well as a lasting gesture of gratitude to the people who once housed you.