Options exist for buying parents’ home in private sale

Ilyce Glink and Samuel Tamkin

Q: My parents want to sell their house to me as part of a retirement plan. I hope to make a contract specifically with them so I pay them an agreed-upon monthly rate with some interest rather than going through a mortgage company.

What are our options? I read your article from 2014 about this topic, but with some of the new tax laws I wanted to know if anything changed. We just want to know our options. Thank you.

A: Truthfully, not much has changed since 2014 on the real-estate side when it comes to buying your parents’ home. There are changes on the federal income-tax side and estate-planning side, but as for the mechanics on how to do it, the process is much the same as it was back then.

You and your parents can sign a contract for you to buy the home. The contract can either transfer the home to you outright or set up the contract as a sale on an installment basis, where you pay over time.

If you buy the home outright, you would then sign a note and mortgage for the financing to them. In short — they’ll be your bank.

With either plan of action, you’d have an ownership interest in the home and you’d have the same federal incometax benefits of owning the home as if you purchased a home from anybody else.

The one thing you have to watch out for is that the interest rate on your loan or amount you owe your parents must not be less than what the IRS indicates for loans of your type. You can go to the IRS website and look up “Applicable Federal Rates” to determine what the minimum interest rate should be in your situation.

Having said that, you need to remember that your interest payments will be deductible on your federal income-tax return if you itemize your deductions; but you will be limited to a total deduction of $10,000, per federal income-tax return, for your state income taxes and real-estate property taxes.

On your parents’ side, the situation is trickier. The amount of money that a married couple can exclude from federal estate and gift taxes has gone up significantly, up to $11,200,000. Most parents don’t have that kind of cash, so the next issue you think about is how your parents will benefit from receiving interest payments from you and whether the sale of the home to you triggers any taxes on their end.

The potential federal tax issues facing your parents is a bit too much for this column.

It would be best to discuss the situation with a real-estate attorney and a tax consultant who can help guide you.