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I need to move my mom closer to me and am considering moving her into a modular home in a 'seniors' park. She will sell her current home, and the default scenario is for her to buy the modular outright and lease the park site (lease is only option on the site).

I'm interested in tax-advantaged alternatives to this scenario. Mom is on low fixed income so pays very little in income tax. I have a somewhat larger tax burden, paying 33% at the margin. I have wondered about investing the proceeds of her sale for her, and buying the modular then renting back to her.

Any thoughts would be appreciated, and please email them to me at calpalmer@mindspring.com

Thanks in advance,

Cal
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[[I need to move my mom closer to me and am considering moving her into a modular home in a
'seniors' park.]]

You sound like a very, very good son, Cal. Your mother is lucky to have you.

[[ She will sell her current home, and the default scenario is for her to buy the modular
outright and lease the park site (lease is only option on the site).]]

I assume that she'll take the gain exclusion on the sale of her prior residence. If you have any questions about the exclusion of gain on the sale of a personal residence, check out my post in the Taxes FAQ area (archives section) on this very issue.

[[ I'm interested in tax-advantaged alternatives to this scenario. Mom is on low fixed income so pays
very little in income tax. I have a somewhat larger tax burden, paying 33% at the margin. I have
wondered about investing the proceeds of her sale for her, and buying the modular then renting
back to her.]]

The rental issue might be a very good one for you. But a few things that you need to consider:

Since the rental income that you receive from her will most likely not cover the expense of the mortgage, repairs, maintenance, depreciation, etc., you'll most likely generate a loss on the rental.

And, since you are in a higher tax bracket, it is possible that your AGI is greater than $150k. If that is the case, your rental losses (which are passive)would be limited and would be suspended. You wouldn't be able to claim the passive losses until (or unless) you had offsetting passive income.

But this is not necessarily a bad thing. Sooner or later you'll sell the modular home, and any of your passive losses would be freed up at that time. So, sooner or later, you'll get benefit for those losses. It'll just be a timing issue.

You also need to know that you'll have to charge mom reasonable fair market rent in order for this deal to work out.

In many cases, renting out a home or apartment that you own will result in a tax loss for you, even if the rental income is more than your operating costs. This is because you will be entitled to a depreciation deduction for your cost of the house or apartment (except for the portion allocated to the land). If your tenant is related to you, however, special rules and limitations may apply. (For these purposes 'related' means spouse, child or grandchild, parent or grandparent, and siblings.) Here's the tax picture:

If you rent a home to a relative who (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it's rented at a fair rental (not at a discount), then no limitations apply. You can deduct all the normal rental expenses, even if they result in a rental loss for the year. (If you have a loss, however, it is a 'passive' loss, which may be subject to a different set of limitations.)

The problem arises if you set the rent below the fair rental value, that is, if you allow your relative a bargain rent. If this is the case, the use of the home by your relative will be treated as use of the home by yourself. The results will be a tax disaster.

Since this now becomes a rental property which you are treated as using personally, you would have to allocate the expenses between the personal and rental portions of the year. Even more seriously, however, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion is zero. Thus, you would have to report all of the rent you receive in income, but none of your expenses for the home would be deductible. (Actually, you would still be able to deduct the mortgage interest, assuming it otherwise qualifies as deductible, and property taxes. These items are deductible even for nonrental homes.)

Given the above, it is important to set the rent at a fair rate. Factors to look at include comparable rentals in the area and whether 'side' gifts were made by you to your relative which could be reasonably interpreted to be the bargain element.

But this could certainly be a tax advantaged way in which to house your mother. But it may also require the assistance of a qualified tax pro in order to lead you through the minefield. At least, that would be my recommendation.

[[ Any thoughts would be appreciated, and please email them to me at calpalmer@mindspring.com

Thanks in advance]]

Hope this helps, Cal...
TMF Taxes
Roy

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[[I'm interested in tax-advantaged alternatives to this scenario]]

Oops...almost forgot, Cal...

If you want to read more about passive losses and rental real estate, visit the IRS web site (http://www.irs.ustreas.gov) and download/read IRS Publications 925 and 527.

TMF Taxes
Roy
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TMFTaxes, I'm just curious and I'm just thinking out loud and this does not apply in any way to me, but could Cal give his mom $10,000, some of which she pays back to him as fair market rent?

This sounds fishy, but suppose there is a different scenario in which I have a tenant who is paying me fair market rent, and then I decide she is my sweet patootie and give her $10,000? At the end of the year the financials in the two cases are the same. (Sweet Patootie has to keep paying rent, I'm not Santa Claus.)
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[[TMFTaxes, I'm just curious and I'm just thinking out loud and this does not apply in any way to
me, but could Cal give his mom $10,000, some of which she pays back to him as fair market rent?]]

Absolutely. Good Thinkin', JAB.

BUT...Cal would have to be careful not to convert gift funds (which are not deductible by him) into taxable income in the form of rental income. As long as the gift is made in good faith, and Mom uses the funds as she sees fit, with no strings attached, there would be NO problem.

[[This sounds fishy, but suppose there is a different scenario in which I have a tenant who is paying
me fair market rent, and then I decide she is my sweet patootie and give her $10,000? At the end
of the year the financials in the two cases are the same. (Sweet Patootie has to keep paying rent,
I'm not Santa Claus.)]]

Not fishy at all. As long as your sweetie is not OBLIGATED to use those gift funds to pay her rent, there is no problem. But again, you must be careful that you don't turn these gift funds into taxable income (in the form of rent income) and...in effect...pay taxes twice on the same $10k (once when you earned it, and again when you recycle it back into your income in the form of rental income).

But it is certainly both possible...and legal.

TMF Taxes
Roy
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Roy,

Thanks for a very thorough and thoughtful reply, and for pointing out the landmines as well as the opportunity. I've an appointment with a tax professional next week.

Merry Christmas,

Cal
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[[Thanks for a very thorough and thoughtful reply, and for pointing out the
landmines as well as the opportunity. I've an appointment with a tax professional
next week. ]]

Good deal, Cal. I think that you'll find this to be a good way for you to go (i.e., renting the home to mom). But it'll depend upon your specific circumstances.

After meeting with the pro, if you have any additional questions or need clarification, make sure to come back here for a visit.

[[ Merry Christmas]]

And Happy Holidays to you and yours, Cal.

TMF Taxes
Roy
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