This type of transaction is what the IRS might consider a "sham". I don't know what state your parents are in, but there might be state law problems too. Problems also might arise when one of them dies.Unless the house was worth only $1, then your parents sold you the house for less than its fair market value (FMV). A sale for less than FMV between related parties is treated as a part gift / part sale. I hope to God that your parents did not get this advice from an attorney, because IMHO he/she committed malpractice.This transaction can create several tax nightmares for you and your parents. Your parents can have gift and estate tax problems. You will have income tax problems, because I am assuming that although they live there, they are not paying you any rent. Depending upon how the IRS chooses to view the transaction, your family could be in for one heck of a nightmare.I caution you about relying on "free" advice on this board or any other place, because you cannot rely upon it when your transaction gets discovered by the IRS. But if you pay a professional for his/her advice you can rely on it and at least avoid the negligence penalty.Good luck!
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