real estate

Buying a home for your parents

Steve McLindenq_v2.gifDear Steve,
I am looking at purchasing a home for my aging parents. Should I establish it as rental property or a second home?
-- Harold

a_v2.gifDear Harold,
It is refreshing that you are returning the favor of providing shelter to the loved ones who once provided yours. Kudos!

The way you structure a home you're buying for your parents will depend on several factors. To buy a house as a second home, most lenders will require that it be 50 miles or so from the borrower's home and that the owner occupy the property for part of the year. However, those qualifications can vary from lender to lender and even be bent in certain circumstances, which you'll see in a moment.

Under the second-home structure, you can deduct interest on a maximum of two residences, which in this case would be your current home and the home you are buying for your parents. Plus, you can deduct property taxes on both as well. Note that it may be a little harder to qualify for a mortgage on a second home because the bank considers the weight of two mortgage payments with no supporting rental-income stream to be an added risk.

Some lenders may insist that your parents become co-borrowers so the house won't be considered an investment home. However, don't put your parents on the deed unless it's absolutely necessary. That asset could count against them in Medicaid tabulations and create some additional red tape when it comes time to sell it down the road.

An investment, or rental home, structure may prove to be your path of least resistance. Before you proceed that way, you should first consider whether your parents can qualify for an option called the Family Opportunity Mortgage, a program at several banks that's designed to allow family members to help elderly parents. The Family Opportunity Mortgage program allows you to structure the mortgage as a second home with no distance requirements whatsoever. There's a big catch, though. The parents must have insufficient income to qualify for a mortgage themselves or otherwise be unable to work.

If that equation doesn't work, and you do go the investment-house route, you would be able to deduct expenses on the place such as repairs, insurance, utilities, cleaning and other maintenance. You would also be taxed on any rent you receive, should you decide to charge your folks a small, nominal sum to cover some of the above-named occupancy expenses.

An experienced certified public accountant or real estate lawyer could help you best explore all the tax implications of both strategies based on your family's unique circumstances. There's no sense in scrimping on a big investment like this one.

And again, way to go, Harold. It's always nice to see "the good son" in action!

Read more Real Estate Adviser columns and more stories about mortgages.

Steve McLinden, who writes the Real Estate Adviser, has written about the industry for 20 years and is a correspondent for National Real Estate Investor and former real estate beat writer. To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "Buying, selling a home" as the topic.

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