With the massive recession of 2008-2009 in full swing, the credit markets have dried up. For this reason, many of us have had to resort to creative forms of financing, one of which is the classic transaction known as sale-leaseback. You can create pretty decent amounts of income and estate tax savings if you buy your parents’ house and then rent it out to them.
These types of arrangements allow tax deductions for your parents if they are over 55 years old. If so, the tax law will allow them to exclude up to $125,000 in proceeds from the sale of the home.
There are many advantages to a sale and leaseback agreement.
The first advantage is that the future appreciation of the house is no longer included in your parents’ estate. This can be a pretty big tax break, right off the bat.
The next advantage is for the person who buys the house… that is, you. By owning your parents’ home, you can protect some of your own income by deducting home ownership expenses, as well as home maintenance and depreciation.
The next advantage is for your parents; It is very simple in the sense that they simply receive cash in exchange for the equity they have built up in their home. Think of it like taking out a home equity loan that you never have to pay back.
The next advantage is one I mentioned earlier, and that is that your parents will get a one-time $125,000 tax exclusion on the profit they receive from selling you the house.
The next advantage is a little less tangible, but it is the fact that your parents will enjoy the advantages of renting. They will no longer necessarily have to take care of maintenance and upkeep, that will be your responsibility from now on. At the same time, they can enjoy living in the same house they are used to.
A sale and leaseback could make a lot of sense if your parents are elderly and struggling to support themselves. If you are already paying for their support, this can be an attractive way to continue supporting them with a tax advantage.
And it’s a way for your elderly parents to save a little face because they won’t just be begging you to support them, they’ll sell you their house, which you can eventually sell once they’re gone.
There are several technicalities that must be confirmed in order to create a valid sale and leaseback agreement. For example, the house must be purchased at fair market value and your parents must sign an actual lease. It should be clear that your parents do not plan to buy the property back from you in the future, and it should also be clear that your parents no longer have control over the house.
Before you get into one of these deals, be sure to check with your local accountant or CPA to make sure you’ve crossed all the T’s and dotted all the I’s.