Renting to parent vs. inheriting

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Drage13
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Renting to parent vs. inheriting

Post by Drage13 » Wed Oct 04, 2017 11:43 am

Hello,

I've done a bit of searching around, but unfortunately most of the results that I'm finding are oriented toward the inverse relationship (parents possibly charging adult children rent).

My mother is 61 and lives an hour away from me and my family (both in Iowa). She is considering moving to be closer to us and we are trying to decide the optimal arrangement for this. I had been just originally thinking that she would sell her house and purchase a new house in my area, either pocketing any surplus or, more likely as her current home is in need of many repairs, paying or mortgaging the shortage. My mother, however, wondered if it would be more beneficial to have my wife and I buy the home for her and she pay us rent. It would be a stretch that we'd be unwilling to take just for an investment property, but something that we might be able to swing for a guaranteed family tenant. The biggest concern is that my mother has some chronic health issues, so while she is working very hard on improving her health and has lost a commendable amount of weight, we are concerned that she may need expensive long-term care for an extended period of time. She has no long-term care coverage; even if she was insurable, the premiums would be cost-prohibitive.

It is my mother's desire to set-up things in whatever way leaves the most inheritance behind when she passes.

I'm happy to provide more granular information if it helps anyone give more specific advice.

Points in favor of mother owning home:
Perhaps some chance that Medicaid (if it comes to that) won't make my mother sell her house or make me reimburse Medicaid from the estate as executor.
Assuming the estate tax is not lowered (I would anticipate my mother's estate being worth less than $2 million, with the majority of that being partial ownership of a family farm that will hopefully soon go into a trust), I'm inclined to think this would be most beneficial in terms of getting a stepped-up basis.

Points in favor of mother renting home that I purchase:
Tax deductions?

Does anyone have any thoughts, tools or guides that would help my mother and I decide how to best accomplish her goal?

aristotelian
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Re: Renting to parent vs. inheriting

Post by aristotelian » Wed Oct 04, 2017 12:00 pm

Why couldn't she just sell her house, rent, and invest the proceeds? Keep you out of it.

Drage13
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Re: Renting to parent vs. inheriting

Post by Drage13 » Wed Oct 04, 2017 12:06 pm

Her view would be that she is wasting her money, paying another landlord when she could have been paying me. I would be a bit inclined to agree with that; if she were to rent, I don't see a reason to not try to be the landlord, provided the financials line-up to my satisfaction.

Two Headed Mule
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Re: Renting to parent vs. inheriting

Post by Two Headed Mule » Wed Oct 04, 2017 12:31 pm

She isn't wasting her money by not paying you rent. She's out the money no matter who she rents from. And from your perspective, you can either buy a house and earn rent from her, or not buy the house and earn a market return from someone else on that same money (visualize investing in a separate REIT fund, rather than stock, if it makes it more lucid). Either way, she's out the money and you can expect to earn a market rate of return. So you should decide this question on a different basis.

Drage13
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Re: Renting to parent vs. inheriting

Post by Drage13 » Wed Oct 04, 2017 12:52 pm

I see your point; I will take your advice and reframe what we're hoping to learn.

Given my mother's objective to maximize the inheritance she leaves behind, is she better off buying a home or renting from "anyone" and investing the difference, given her concern over long-term medical care costs?

When reframed that way, really this becomes an issue of how to shield assets from Medicaid, right?

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Sandtrap
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Re: Renting to parent vs. inheriting

Post by Sandtrap » Wed Oct 04, 2017 1:46 pm

Renting and investing proceeds or buying a modest home after selling the original home would seem to be the most prudent for your mom as well as yourself. She is only 61 and a lot can happen over the next several decades. If you purchase a home and situations change, you may be stuck with a home and having to sell or rent it out yourself to pay for the mortgage. It would seem the safest for her to sell her home and rent for both of you to get a gist of the situation before committing your finances long term. True, this is family, but it should be a sound long term business decision for both parties, to the detriment of neither.
Good luck.
j

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dm200
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Re: Renting to parent vs. inheriting

Post by dm200 » Wed Oct 04, 2017 1:54 pm

If she can afford it, then I would lean towards her purchasing a residence.

1. It seems this might be simpler, net, over the long run.

2. Down the road a few (or many) years, she might need/want a reverse mortgage.

3. Some jurisdictions (check this - especially if there are different possible places for her) offer real estate tax deferral or forgiveness (or a combination) for certain folks over 65. She would not get this if you had ownership interest in the residence.

4. There may also be some other senior benefits in the jurisdiction.

5. Fewer financial "entanglements" with you.

littlebird
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Re: Renting to parent vs. inheriting

Post by littlebird » Wed Oct 04, 2017 2:43 pm

As a single person, if she has equity in a house, and Medicaid pays part or all of her long term care, Medicaid will require her to sell the house at some point. Exactly when will depend on state law, but the house will not be passed on to you if the taxpayers fund her care. So this should not be a factor in the decision.

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Pajamas
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Re: Renting to parent vs. inheriting

Post by Pajamas » Wed Oct 04, 2017 2:52 pm

If you need to shield $2 million in assets from Medicaid or inheritance taxes or anything else, you should consult an attorney in Iowa who specializes in elder law and trusts and tax planning for assistance.

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celia
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Re: Renting to parent vs. inheriting

Post by celia » Wed Oct 04, 2017 3:08 pm

Drage13 wrote:
Wed Oct 04, 2017 11:43 am
My mother is 61 and lives an hour away from me and my family (both in Iowa). She is considering moving to be closer to us and we are trying to decide the optimal arrangement for this.
.
.
The biggest concern is that my mother has some chronic health issues, so while she is working very hard on improving her health and has lost a commendable amount of weight, we are concerned that she may need expensive long-term care for an extended period of time.
.
.
It is my mother's desire to set-up things in whatever way leaves the most inheritance behind when she passes.
You have given us three different goals that can't all be accomplished.

What is your mother's primary goal?

What is your goal?

delamer
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Re: Renting to parent vs. inheriting

Post by delamer » Wed Oct 04, 2017 3:20 pm

Pajamas wrote:
Wed Oct 04, 2017 2:52 pm
If you need to shield $2 million in assets from Medicaid or inheritance taxes or anything else, you should consult an attorney in Iowa who specializes in elder law and trusts and tax planning for assistance.
Excellent advice. The fact that most of her assets will be held in a trust with partial ownership of a farm makes legal advice key.

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flamesabers
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Re: Renting to parent vs. inheriting

Post by flamesabers » Wed Oct 04, 2017 4:42 pm

I think a question to ask yourself is to what extent (in terms of risking time and money) are you willing to spend to help preserve the size of her estate? It's one thing to be prudent with one's finances and minimizing her future tax liabilities, quite another to take on major changes such as buying another house and becoming a landlord to attempt to fulfill this goal.

Perhaps the best way I think for your mother to maximize the size of her estate is to live frugally and be as proactive as possible about her health in order to minimize healthcare costs for preventable health problems. In this regard, becoming her landlord isn't particularly productive as you have to take on a mortgage (along with all of the responsibilities of being a landlord) or pay a hefty sum of cash to buy a house for her. If she falls on hard times and is unable to pay rent to you, you'll be forced between having to let her live in the house rent-free or being the bad guy in the family who evicted his own mother. If her health worsens and she has to go to a long-term care facility, you'll be the one on the hook to find a new tenant for the house or go through the hassle of selling it.

I think a much better alternative is she rents an affordable place that is close to you and the rest of the family. Ideally with a setup like this she won't be spending too much on housing and your finances won't be on the line.

aristotelian
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Re: Renting to parent vs. inheriting

Post by aristotelian » Wed Oct 04, 2017 5:19 pm

How about encouraging her to purchase long term care insurance? That would be a simpler way of protecting the estate. Also just gifting you money, either gradually orwhen the time comes, would-be much more tax efficient than this rental scenario.

NotWhoYouThink
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Re: Renting to parent vs. inheriting

Post by NotWhoYouThink » Wed Oct 04, 2017 5:33 pm

There have been a thousand threads on this forum about paying off the mortgage vs. investing, and there is no clear winner. In your mother's case, is it better for her to spend the money from the sale of her house paying off a new house, or investing the money and paying rent? I don't know. It depends on what Iowa real estate and her hypothetical asset allocation do with relation to each other over the remainder of her lifetime, which I can't predict, and I don't believe you can either.

To maximize her estate, as mentioned by flamesabers, she should live frugally and take care of her health. Also, you could talk to her about how to manage any money she has outside of real estate, using low cost investments and an appropriate asset allocation.

I really don't understand how anyone who loves his parent could possibly want to force the parent to spend down assets and rely on Medicaid. Medicaid is the last resort for seniors who have run out of money to care for themselves, need nursing care, and have no where else to turn. In-home aides or self-funding in more upscale retirement or nursing homes is a much better option. Telling Mom "I've got all your money now, so you can move into whatever government funded facility that will take you" is not a conversation I will ever have or recommend.

There seems to be some need people have to strengthen family bonds by intermingling assets in complex real estate arrangements. It seldom makes financial sense.

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