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Tax Law (Questions About Taxes)/Tax-advantaged methods of supporting a parent

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Hi John,

My mom is 67 and struggling a bit with her finances. I am at a point where I will need to begin supporting her financially, which I'm happy to do. However, if possible, I'd like to do so in a way that has some tax benefits.

My mom's one big asset is her home. It is a 100 acre "ranch" in Colorado with several ponds and a beautiful old restored log cabin. She owns it free and clear with no mortgage or loans tied to it. After that, her assets and income are slim. She gets a little SS and has a few small investments. She was a stay at home mom and has pretty poor employment prospects given her age and experience.

My mom has considered a reverse mortgage but the property has a lot of emotional value to our family. It would be tough to see it go away.

I could give my mom a stipend every month but I have another thought. I'd like to buy the property from her in a seller financed deal. I like the idea of seller financing this for three reasons: 1) she is not good with money and I don't want her to receive a lump sum payment. She doesn't live extravagantly, she just makes dumb decisions (like putting her entire life savings into gold in 2011). In a seller finance, she would receive a monthly payment which would allow her to live on a fixed income. 2) If I'm going to pay someone interest on a loan, I would rather it be my mom. 3) My mom and I can set the interest rate. Since this would be my second home and not a rental property, I'm assuming I can deduct the interest and property taxes from my taxes. If that is the case, I'd actually rather pay more in interest than in principle.

My question is whether this seems like a credible strategy from a tax perspective and whether there are any other common methods of supporting a parent through tax-advantaged methods. My mom is the sweetest woman on the planet and I am very motivated to help her. If I can do so in a tax-advantaged way, that would be my ideal.

Thank you,
Brian

Answer
Brian,

Thanks for your question.

There are a number of issues related to the course of action that you have outlined. First, there are rules regarding how the installment sale must be structured in a related party transaction. These rules are designed to prevent abuse of the tax laws. You would need to consult with an expert in this area to help you structure the deal to make certain that you comply with all applicable laws.

Second, she would likely need to report the sale on her tax return each year as the installment method of reporting the sale would be used. This could be a significant cost or time involvement in filing the tax returns. And, of course, she has to pay tax on the gain from the sale as well as tax on the interest paid to her.

Third, you imply that she has owned the house for a long time. Possibly, she inherited half of it when her husband passed away. At any rate, I would guess that there is a substantial gain to be realized if the house is sold. When she sells it, she could exclude up to $250,000 in gain, but would be subject to taxes on the remaining gain. This could be a significant tax hit.

As far as other methods to accomplish this, there are very limited opportunities for income transfer between related parties - which is essentially what you are seeking to do. Discussion of those would be rather long and involved and would require me to know much more about your financial situation. Such a discussion would require a significant amount of my time and would not be appropriate in this pro bono forum.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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