Purchasing My Grandmothers Home

Member since 2020 · 13 posts · 2 votes

Hello All! My grandfather recently passed and my (paternal) grandmother is looking to sell her home. My mother lives on a fixed income and is currently renting an apartment. My plan is to move my mother into my grandmothers home after purchasing it. I’ll let her rent it from me (At and extremely low rate that won’t cover the new mortgage, but again, it’s mom!).

I’m trying to go about the best way to purchase this home from Grandma without realtors. I’m in North Carolina. Because of the new “CARES ACT” I believe I’ll be able to pull from my 401K penalty free to buy the home outright.

I may also consider financing the money from a private lender.I want to know what I need to do in order to make this transfer smooth and seamless (if there is such a thing) without having to get realtors involved.

Thanks in advance everyone!!

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Joe SplitrockPro Member

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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

@Chris Bell be aware that renting below fair market value to a relative would disqualify the property as a rental property, which means you cannot claim expenses. This is to prevent people from buying a property for a relative to live in under market value, to generate a tax loss.

https://www.irs.gov/taxtopics/tc415

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Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Chris Bell
Does Grandma own the home free and clear? Is grandma going into assisted living?
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
No, she has about 60% equity in the property, but doesn’t have free/clear Ownership. She’s going into an apartment for now, not assisted living.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
Why is your grandma moving to an apartment? Why not let her live in it and rent it from you instead of your mom?
Are there any other kids or grandkids? If so, make sure you talk to them otherwise it will cause problems because they will think you are getting a deal and taking their inheritance.
1 Reply
Todd Rasmussen
Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Chris Bell
I would look at having her quitclaim the property to you, then just refinancing the existing loan into your name. You can make payments directly to her for the 60% equity amount and she'll have lifetime income. That might be more desirable than a lump sum now. If she passes before you've made complete repayment, you can just split that payment between heirs.
Be careful, nothing brings out the worst in people like inheritance. You may even want another member of the family (outside of your nuclear family) to review all the docs and strategy with her, to help eliminate any perception of ill will.
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Theresa Harris She doesn’t want to stay in the home any longer. She says It’s because it’s “too big” for just her.
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Todd Rasmussen Thanks for the advice! I’ll definitely look into doing that. And yes you’re right about that! It’s for that reason that I have one of her daughters helping with overseeing the process. I want the rest of the family to know that this move is on the “up and up”. I didn’t want her to sell, but if she’s gonna sell anyway, I’d rather it be to me! Thanks man!
1 Reply
Keaton M.
Austin, TX · Member since 2017 · 75 posts · 39 votes
6y
@Chris Bell
Why rent to mom? If you’re wanting to take care of her, I’d say rent it to someone who pays more and split the difference. The house may be too much for just your mom too if it’s too big for grandma. Also, I love my mother but I’d never rent to her. I don’t let any one move in that I couldn’t evict.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Chris Bell be aware that renting below fair market value to a relative would disqualify the property as a rental property, which means you cannot claim expenses. This is to prevent people from buying a property for a relative to live in under market value, to generate a tax loss.
https://www.irs.gov/taxtopics/tc415

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George Blower
Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
6y
@Chris Bell
Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Loans:

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
- - Individual who is diagnosed with COVID-19, with a CDC-approved test;
  - Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  - Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:
- Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
- Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
- Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
- Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
- First Payment:
  - For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
  - For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).
EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):
- - Individual who is diagnosed with COVID-19, with a CDC-approved test;
  - Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
  - Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
If you meet the above conditions:
- You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
- You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
- If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.
2 Reply
Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Keaton Munsterman Mom lives in a small apartment and is wanting a place of her own. I could rent to another tenant at a higher price, but then there’s a higher risk of property damage, late payments (or no payments), etc. Being that mom is on a fixed income, I know that her portion of the rent will always be there. That, and she’s the cleanest person I know lol. She’ll treat the property as of it were here own (or better because it’s mine). Renting to mom helps me increase my worth while helping her out. It’s a win/win, 2 birds 1 stone, kind of transaction. Thanks for your response!
1 Reply
Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Joe Splitrock Now THAT is something I did not know. I was going to start an LLC specifically for tax purposes. That is very valuable information. Thank you so much!
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@George Blower Thank You for the information! I'm shutting down an existing LLC because of the hit the business took during Covid-19. This should qualify me to withdraws from my employers retirement plan penalty-free. Thanks again!
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
Originally posted by @Chris Bell:
@Theresa Harris She doesn’t want to stay in the home any longer. She says It’s because it’s “too big” for just her.

Could her and your mom both live there?
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Theresa Harris I feel like the “Real” reason grandma doesn’t wanna live there any longer is because the home reminds her too much of grandad. Now that he’s gone, I think she just wants a fresh start.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
Originally posted by @Chris Bell:
@Theresa Harris I feel like the “Real” reason grandma doesn’t wanna live there any longer is because the home reminds her too much of grandad. Now that he’s gone, I think she just wants a fresh start.

And that is perfectly understandable.
1 Reply
Percy Matsunaga
Flipper/Rehabber · Sacramento, CA · Member since 2016 · 282 posts · 85 votes
6y
@Chris Bell
I would get in touch with a Loan Officer that can help you transfer the loan and title over to you.
After that you could do a cash out refi to make any repairs to the home and not get taxed on the $$.
If there is 60% equity the loan officer should be able to qualify you with No problems.
0 Reply
Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Percy Matsunaga Awesome! I’ve got a great loan officer (Just did a refi in my home)! I’ll definitely be reaching out to him.
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Chris Thomas
Rental Property Investor · Central Kentucky · Member since 2019 · 67 posts · 43 votes
6y
@Chris Bell. Are you paying market rate for the house?
0 Reply
Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Chris Thomas About 30k under the market value.
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Marian Smith
Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
6y
@Chris Bell Isnt there a book in your local library? ask the librarian. sign a sales contract with grandma. pay off her loan & have grandma sign a deed transferring ownership to you. probably notarized. record the deed. done. after you pay grandma. unless you want a survey and title insurance. then have the title company do it all.
and yes you can rent below market to your mom and take the loss off on your taxes as long as it is a reasonable family discount. the % is published somewhere. or you you can also claim her as a dependant if you provide over half her room and board or so. but dont trust me on any of this. look it up.
1 Reply
Will Dixon
Accountant · Corte Madera, CA · Member since 2018 · 73 posts · 88 votes
6y
@Marian Smith
@Chris Bell
Known as the “good-tenant-discount”. There is no specific amount that is allowable but 10% is considered to be conservative enough that you shouldn’t run into issues.
https://www.biggerpockets.com/blog/renting-to-family
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Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@Will Dixon Perfect, thanks Will!
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James Baker
Property Manager · Pittsburgh, PA · Member since 2018 · 27 posts · 15 votes
6y
@Chris Bell
Just to be the devils advocate...
I see a lot of fishy-ness with this deal.
It seems like your trying to do the right thing and help your family out. However, I’d be very careful.
I’d hate to see you get YOURSELF in trouble trying to help some else.
The saying goes “don’t rent to family and friends.” Right...
I wish you the best of luck. Just be careful and look out for yourself.
1 Reply
Chris Bell
OP
Member since 2020 · 13 posts · 2 votes
6y
@James Baker I appreciate it man! Will do💪🏽
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Jesus Garcia
Rental Property Investor · Baytown, TX · Member since 2008 · 94 posts · 21 votes
6y
With all due respect and with no knowledge of the whole situation, like someone said this all sounds so fishy. If you're trying to help Grandma out, why not let her get an agent and let her get as much as she can out of it to give her a cushion for this latter part of her life. I mean even if the house is only worth $100K she's losing out on $30K by selling it to you.
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