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Selling Home to the Kids May Save the Nest Egg

The following article has been provided by Tom Kelly, courtesy of the Oakland Tribune.

 

The kids were gone, but the couple did not want to move. She had her garden, weed- free and rich in roses. His golf course was down the street where he drove his electric cart to meet the guys for coffee - even if his legs were simply too stiff to play nine holes.  They could use some cash, but didn't need a ton. Why not stay put and sell the family home to the kids?

Children can rent to their parents after buying the family home. It's an attractive alternative for folks who wish to stay put instead of moving to a small apartment or condominium.  It's a sort of domestic reverse mortgage. And, unlike many of the reverse mortgages available today, the deal can be less taxing on everybody.

The reverse mortgage is one in which the lender pays the borrower each month, instead of the borrower paying the lender. The payments could be a boom to seniors whose only real asset is tied up in their home.

Selling the family home to the kids can bring the same result. However, be prepared to be probed, prodded and picked on if you cut corners. Anytime you transact with a family member, Uncle Sam seems to roll over and take notice. Giving a complete stranger a deal is always acceptable; attempt it with a family member, and you're often paying dearly.  For example, I know a retired couple who sold their rural home to their children for $105,000.  The kids had the home appraised, and comparable homes in the area had been selling for $94,000 - $105,000.

The two kids put up $5,000 apiece for the $10,000 down payment, and the parents financed the balance of $95,000 on a real estate contract at 8 percent interest for 40 years.  The children, as buyers, pay $900 a month ($450 apiece) to the parents.  The parents, as renters, initially paid $300 a month to the children.

The children selected a payment schedule that also benefited both sides.  The monthly principal and interest payment on the loan amounted to $660.25. By paying $900, the young people will pay off the loan faster, and the parents receive more tax-excluded income a month.

"We got audited because we were not charging fair-market rent", the daughter said. "So we had to double our parents' rent."

Still, the parents were taking in $300 more than they are paying out.  And, because of the
$500,000 tax-free exclusion on capital gains for a married couple on the sale of a primary residence, the $10,000 down payment and all money paid toward the principal is tax-free.
Interest income is not excluded from taxable income.

The main drawback now to keeping the home in the family is the astronomical price of homes in many popular areas and the inability of the kids to carry the negative cash flow every month brought by a huge mortgage. Plus, a lot of retired folks need all the proceeds from the home sale just to survive, leaving the children with more expensive conventional financing instead of the parents carrying the paper.

For example, the median price (half the homes sold for more, half for less) in California's Santa Clara County in April was $410,000. In Palo Alto, not far from Stanford University, the median price was $725,000, including one home that sold for a staggering $1 million more than the asking price. If you took that $410,000 median price in Santa Clara and supposed the kids had saved $60,000 as a down payment ($30,000 apiece), the monthly mortgage payment on a 40- year, 6 percent loan of $350,000 would be $1,925 a month, before taxes and insurance.

That's a tough rent nut to crack - even on these red-flag, extremely favorable terms - unless the kids are gainfully employed by one of Silicon Valley's finest software firms.  Then they probably would be able to keep the family home as a parent/guest quarters and build a palatial estate out back.

But other markets might be more palatable. The median housing price in Las Vegas, for example, is $163,453, and in Portland, Oregon, it's $218,000. How much will it cost for your kids to take over your nest egg depends on where you live.

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