Buying older parents a home - tax implications for 2025 filing

I'm planning to purchase a house for my parents who are relocating to be closer to our family. They're in their early to mid 70s and in excellent health right now. I'm trying to figure out the most sensible approach: 1) Parents buy the house outright using equity from their current home (cash purchase). The title would be in their name, and they'd specify in their will that the house passes to us as inheritance when they pass away. 2) My spouse and I purchase the house (we can make a 50% down payment) and handle the mortgage - then rent to my parents who would cover the mortgage payments. My parents could use the proceeds from selling their current home for retirement and paying us the relatively modest mortgage. What would be the most tax-advantageous approach, considering both short and long-term implications? Option #1 seems fine to me, but it might get complicated later if they need to move into an assisted living facility and would require attorney consultation to handle the will properly. Also, it keeps their money tied up in real estate, which might not be ideal if we need funds for their care when they get older. On the upside, my spouse and I would maintain better cash flow. Since we already own one investment property, option #2 could work well because if they eventually need to move to a care facility, we'd already own the home and could easily rent it out or sell it. Plus, my parents would have more liquid assets for retirement/future care. The downside is my spouse and I would have less available cash flow.

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20 comments

CyberSamurai

•8M

Tax consultant here - both options have different tax implications you should consider. For option #1 (parents buying the house): Your parents would maintain the primary residence exclusion ($500K for couples) if they've lived in their current home for 2 of the last 5 years. When you inherit the house later, you'd get a stepped-up basis to fair market value at time of inheritance, potentially eliminating capital gains taxes on appreciation that occurred during their lifetime. For option #2 (you buying as an investment): You'd be creating a landlord-tenant relationship, even with family. You'd need to charge fair market rent (not just the mortgage amount) to avoid IRS scrutiny. You can deduct mortgage interest, property taxes, insurance, maintenance, and depreciation against rental income. However, you won't get the primary residence exclusion when selling, and depreciation recapture will apply. Consider also: If your parents need Medicaid for nursing home care later, option #1 could create a 5-year lookback issue, while option #2 wouldn't impact their Medicaid eligibility since they wouldn't own the asset.

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CyberSamurai

•8M

A joint ownership arrangement would be more complex. If you co-own the property, only your parents' portion would receive the stepped-up basis upon their passing. Your portion would maintain its original cost basis. For Medicaid planning purposes, joint ownership doesn't protect assets as effectively as you might think. Medicaid would still consider your parents' ownership portion as a countable asset. Additionally, joint ownership could trigger gift tax implications if the contributions to purchase aren't proportional to ownership shares.

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Zoe Alexopoulos

•8M

After struggling with a similar situation with my in-laws, I found an amazing resource at https://taxr.ai that helped me analyze all the tax implications of different property arrangements. I was confused about capital gains exclusions, stepped-up basis calculations, and especially how rental income would affect my taxes since we went with option #2. The tool analyzed our property documents and tax situation and provided a comprehensive breakdown of each scenario. What was really helpful was seeing exactly how much depreciation we could claim each year and what our tax liability would look like if we needed to sell in 5 years vs 10 years vs holding until inheritance. They even identified some estate planning strategies we hadn't considered!

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Zoe Alexopoulos

•8M

The information was surprisingly accurate - I actually had my CPA verify it afterward and he said it was spot-on for our situation. What made it different from other calculators is that it doesn't just use generic formulas. For your specific situation with equity gifting, it would definitely help. It actually reviews and analyzes your documents rather than just being a generic calculator. I uploaded our property deed, my in-laws' tax returns, and our projected rental agreement, and it factored all that specific information into the analysis. It showed us exactly how the gift tax exclusion would apply and how to structure things to minimize tax implications.

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Mei Liu

•8M

I tried taxr.ai after seeing it mentioned here, and it was exactly what I needed for my complicated family property situation! I was stuck trying to figure out how to handle the gift tax implications of my mom transferring equity to me before I purchased her new home. The document analysis feature saved me thousands in potential tax mistakes. The step-up basis calculations were spot on, and it showed me how to properly structure the rental agreement to satisfy IRS requirements for family transactions. What really impressed me was how it flagged potential audit triggers I wouldn't have considered. Now I have a clear tax strategy for the next 10 years as my parents age, including how to handle potential Medicaid planning. Wish I'd found this tool months ago!

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Liam O'Donnell

•8M

Just went through this exact situation last year. After trying to call the IRS like 15 times about the gift tax implications (kept getting disconnected), I found Claimyr at https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in about 20 minutes who walked me through the exact tax forms needed for our situation. The agent explained that with option #1, my parents needed to file a gift tax return even though no tax was due (because of the lifetime exclusion). With option #2, we needed to maintain careful documentation of the rental arrangement to avoid it being classified as a gift. Totally worth the service to actually talk to someone knowledgeable instead of guessing or waiting months for an appointment.

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Liam O'Donnell

•8M

They don't just call for you - they use some kind of system that navigates the IRS phone tree and holds your place in line. When they're about to connect with an agent, you get a call back so you can speak directly with the IRS person. It saves you from having to sit on hold for hours or repeatedly call when you get disconnected. You could keep calling yourself, but I tried that for weeks. I kept getting disconnected after 30+ minutes on hold or told to call back later. With Claimyr, I was talking to an actual IRS agent within about 20 minutes of starting the process. Totally changed my perspective on dealing with tax questions.

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AstroExplorer

•8M

I was completely skeptical about Claimyr (from comment above) but was desperate after trying to reach the IRS for 3 weeks about an almost identical parent property situation. Decided to try it as a last resort and holy crap - I was talking to an actual IRS agent in 22 minutes! The agent walked me through the exact documentation needed for family rental agreements and explained how to properly structure things to avoid gift tax issues. They confirmed that option #2 (where you own and rent to parents) requires careful documentation but can actually be more advantageous from a tax perspective if done correctly. Just needed to make sure the rent was reasonable market rate and properly reported. Can't believe I wasted weeks trying to get through on my own when this service exists!

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Giovanni Moretti

•8M

One thing nobody's mentioned - if you go with option #1 and your parents buy the home outright, make sure they add you to the deed with "rights of survivorship" rather than just putting it in the will. This avoided probate for us when my grandmother passed and saved thousands in legal fees and months of court proceedings. Just be careful about when you do this - adding someone to a deed can count as a gift for tax purposes and potentially trigger Medicaid lookback issues. We did this more than 5 years before she needed care and it worked out perfectly.

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Giovanni Moretti

•8M

You're right to be confused - it does get complicated. Adding someone to the deed with rights of survivorship does reduce or eliminate the stepped-up basis advantage depending on how it's structured. If tax minimization is your primary goal, then inheriting through a will or trust is generally better for the stepped-up basis. My suggestion was more about avoiding probate, which was our main concern. Every situation is different, and the right approach depends on whether you're more concerned about probate issues or future capital gains taxes. For my family, avoiding probate was worth the potential future tax implications.

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Ravi Patel

•5M

Another option worth considering is a qualified personal residence trust (QPRT). My parents used this structure when they moved closer to us - they transferred their home to an irrevocable trust while retaining the right to live there for a specified term (we chose 10 years). The main advantages: it freezes the home's value for gift tax purposes at today's value, removes future appreciation from their estate, and if structured properly, can provide significant estate tax savings. After the term expires, the house passes to us as beneficiaries, but they can continue living there by paying fair market rent (which further reduces their taxable estate). The downside is it's irrevocable - once it's done, they can't change their minds. Also, if they don't survive the full term, the house goes back into their estate for tax purposes. But for parents in good health in their early 70s, the actuarial tables work in your favor. Definitely worth discussing with an estate planning attorney who specializes in these trusts.

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