Buying parents home - owner financing?

2 Replies

Hi all —

I have seen numerous posts on this topic, but none seem too similar and am looking for creative (if any) ideas to transact. 

My folks (retired, not working) are relocating south (future primary residence) and I am going to buy their home from them in NJ. Estimated $1.2-1.3m. Initially I plan on giving them $1m so they could use this money to purchase their new home (which they lived in for 15+ years). In return, they are going to rent the house back from me as they will then use this as their ‘second home’ for 5-6 months per year. This home will be an investment for me and could become a residence at some point. I own no other property. 

Question is from a tax perspective for both sides to be fair, is this best structured as  

1) ‘loan' them the money, put a lien on the house for that amount, keep it in their name and collect interest/‘rent'? (Somewhat like a reverse mortgage?)

2) buy the home at MV and assume title in my name and just treat them as tenants?

3) any other suggestions? 

As an aside.. I have siblings; there is probably cap gains over the ~$250k mark that I have seen mentioned (for them) 

I will end this message by stating I will seek CPA/estate planning services to help assist with overall strategy but looking for something I could be missing in the interim 

@Daniel L. , a few things to consider before you get into tax questions:

  1. Is your parent's home a good rental? The answer is no. You'll never be able to get enough rent ($12-13k/month) to cash flow.
  2. If you pay $1MM for a $1.3MM property from your parents the IRS will likely see the difference as a "gift" and you could owe taxes on all or a portion. Since this won't be an arms-length transaction, it's likely to get extra scrutiny.
  3. Why do you want your parent's home? Emotional attachment? That's perfectly understandable, just don't confuse that with a good investment.

Bottom line: if you want to invest in a $1MM property, there are much more profitable ways to do it.

@Jaysen Medhurst Appreciate your thoughts. Apologies my initial post was not clear. I am ‘putting down’ $1m upfront in order for them to purchase another home. The final transaction price will be MV or $1.2-1.3m - just looking for ways to structure this best for all parties. Correct, I will not be getting $12-13k/month in rent or 10% yield ... but I dont think there are too many people getting that these days,  especially in coastal cities. But I am am a newbie and not a RE guy so could be dead wrong