When mom and dad are ready to downsize or move to a home with less maintenance, you may have the option to buy their home. Doing so can save quite a bit of hassle for both them and you, limiting the need to enter the home selling or buying market. It can also help you keep the “family home” in the family. You may love raising your own family in the home that you grew up in, putting your personal touch on the space while preserving memories at the same time. Before you jump into this idea, make sure you weigh your options. Buying your parent’s home does have some potential financial considerations to make.
Covering the Down Payment
Even though you’re buying your home from your parents, you will still need to go through the normal mortgage channels, and your lender will want a down payment. If you don’t have the cash reserves for the down payment, your parents can help with what is called a “gift of equity” which is a gift for the down payment amount that comes from the home’s equity.
A gift of equity is not an actual gift where money changes hands. Instead, the parent writes a letter gifting the amount from the home’s equity, and the lender views that as the home’s down payment.
Choosing the Purchase Price
In transactions where a parent is selling a home to a child, the parent is often not looking to make money on the sale. They may offer a price that may be less than the current market value; this is not necessarily a bad idea, but it does create a potential problem that has to be addressed.
If the purchase price is much less than the home’s current market value, the difference is considered a gift. This gift is then taxable. If the amount of the difference and a gift of equity combined is higher than the current annual gift tax exclusion amount, the child will have to file a gift tax return. As of 2019, the gift tax limit is $15,000.
Inspection or No Inspection
Because this is not a traditional home sale, you may be able to skip the home inspection. The lender will require an appraisal, but usually not an inspection. While this can help you save money, you do face a risk. If you move forward with the purchase, only to find that the roof starts to leak six months down the road, you are now responsible for the cost of the repair. The inspection will help you know for sure what the home’s condition is before you decide to buy it and helps prevent any ill feelings between you and your parents.
Pros and Cons of Buying Your Parents House
So should you buy your parent’s house? The answer depends. If you want the home, would like to buy a home with less hassle and understand the tax implications of the process, then yes. If you do not want to take on the burden of the family home or are unable to shoulder the tax burden of this process, it may be better to look elsewhere. The bottom line is that this type of purchase can be an attractive option for both parties as long as you go into it with the full knowledge of what to expect.