I’m the only child and manage the finances for my 94 year old mother, who has dementia, needs 24 hour care, and is in a group home living situation- very good care, but expensive, around 100K/year.
She has about $260K in investments, 60K of which is in an IRA, the rest in stock & mutual funds, all held by T. Rowe Price. So she is able to keep going for a while, but not indefinitely. Her only other asset is her house, which I just had independently appraised at 1.08 million. It’s been sitting empty for nearly a year, with the neighbors keeping an eye on things. But it still takes something like $6-800 every month to keep up with taxes, insurance, maintenance, and basic utilities.
So it’s very likely the house will need to be sold to cover her expenses. The next door neighbors, who were very helpful to her when she was living there, want to buy it for one of their parents. But because of the increase in interest rates they have asked if we will accept a several hundred thousand dollar down payment and carry a mortgage to cash out in 5 years. I don’t fully understand the tax implications of this kind of sale. As I understand it, her basis in the house reset 12 years ago when my father died. Since then the Puget Sound region has seen incredible appreciation and I’m very sure her gains will exceed the 250K allowance that is free from Capital gains tax. If she carries a mortgage with a big down, and accepts monthly payments how are those gains allocated between the lump sum and the installment payments? What considerations should I be looking at for this kind of sale vs. a simple cash out?
oceanconcepts: "But because of the increase in interest rates they have asked if we will accept a several hundred thousand dollar down payment and carry a mortgage to cash out in 5 years. I don’t fully understand the tax implications of this kind of sale. . . .
Just looking for some ideas or input, thanks."
There was a recent discussion on the “Buying or Selling a Home” Board about seller financing. See post 129944 on that board for the start of the discussion.
Thanks, I’m sure professional advice is in order, I’m mostly trying to be as well informed as possible ahead of that.
No current mortgage on the house, so we are free of that consideration. I’m mostly trying to figure out the best strategy for dealing with what will be a 500K capital gains issue, and if holding a private mortgage would help or hurt. As was pointed out above, that is mostly a tax problem.
Good point re. insurance, I’m over there as often as I can be, but don’t like the idea of the house just sitting empty.
there is a thing called the “applicable federal rate”: https://www.irs.gov/applicable-federal-rates . The interest charges must be high enough to satisfy that rate, or else it gets looked at like a gift for tax purposes.
make sure the mortgage has the correct paper trail to protect your mother’s interests, including the right to foreclose for nonpayment. There’s a reason the prospective buyer wants a mortgage from your mom and not a more traditional lender…
from a tax perspective, any capital gains tax and transfer taxes due are due for the year of the sale, but if your mom holds a mortgage, that mortgage gets paid over time. Depending on the specifics and timings involved, that could leave your mother in a cash-tight position.
depending on the size of the gain involved, the income could raise your mother’s Medicare Part B premiums for a year as well as increase the tax on her Social Security benefits for a year, so be aware of that. Of course, her care is likely at least partially deductible, so that could be a partial offset as well.
the interest payments on the mortgage will be taxable income to your mother in the year the payments are received. Most mortgages are amortized, which ends up meaning higher interest payments in the early years… Again, depending on specifics, the income could raise your mother’s Medicare Part B premiums and the taxes on her Social Security benefits as well.
I’m sure there’s probably more involved… But these are things to at least consider.
I’m mostly trying to figure out the best strategy for dealing with what will be a 500K capital gains issue, and if holding a private mortgage would help or hurt.
I’m not really answering your question, but just recommending that your mom not be the bank and carry buyer’s mortgage. Based on the information you provided, it will be more of a hassle if you need to access more cash for your mother’s care earlier.
What if buyers in future don’t qualify for a refinance? Your mom’s care could suffer if she doesn’t have access to her cash.
In 5 years, if they don’t qualify to refinance the mortgage; how willing are you to go through a foreclosure?
And do these buyers no longer qualify for a traditional mortgage because of the higher rate environment? That should be a red flag.
Better off selling it on the open market: you’ll get top dollar and all the proceeds from the sale.
I would look to get home listed asap and reduce the ongoing maintenance. Longer it’s off the market means less overall cash your mom has for her expenses. Coming from experience, costs only increase going forward; and it’s an exponential increase. Every 2 years I would go and re-negotiate with memory care unit my mother as price increases were crazy.
A few thoughts. One day you will inherit the property on stepped up basis. That’s the best tax deal available. Better to borrow against the asset if you can find a lender willing to do it.
You mother’s nursing home expenses might be tax deductible as a medical expense. That can make a difference.
I’m the only child and manage the finances for my 94 year old mother, who has dementia, needs 24 hour care, and is in a group home living situation- very good care, but expensive, around 100K/year.
She has about $260K in investments, 60K of which is in an IRA, the rest in stock & mutual funds, all held by T. Rowe Price. So she is able to keep going for a while, but not indefinitely. Her only other asset is her house, which I just had independently appraised at 1.08 million. It’s been sitting empty for nearly a year, with the neighbors keeping an eye on things. But it still takes something like $6-800 every month to keep up with taxes, insurance, maintenance, and basic utilities.
So it’s very likely the house will need to be sold to cover her expenses. The next-door neighbors, who were very helpful to her when she was living there, want to buy it for one of their parents. But because of the increase in interest rates they have asked if we will accept a several hundred thousand dollar down payment and carry a mortgage to cash out in 5 years.
I wouldn’t do it. There’s no advantage to you, nor to your mother, and it’s her money, and her house.
The 5-year proposed loan term will probably outlive your mother. What the neighbors are proposing is for their benefit, for their parent, who may also not live long.
As long as the market is hot in your area, sell the house. You will need the money for your mother’s expenses in the near future. The hot market may not last forever, but the continuing care costs for your mother will be there for who know how many years.