Clents Want to Give a Relative a Home

[JohnH]

Client posed an interesting set of questions to me today - just what's needed these last few days before Apr 15. Much of this is legal rather than tax, but I want to provide informal guidance to help them in speaking with their attorney.

Client and his wife want to provide a home for his wife's sister and her husband who are in need. The sister & husband are in their late 60's - clients are in their early 60's.

Clients are on the verge of purchasing a small cottage (about $60K, cash deal, no financing) for this purpose. They're asking for thoughts on how the transaction could/should be structured with the sister & her husband. Client's intent is to provide the home at no cost, but retain the value of the property for their future retirement or for their own heirs.

Options seem to be 1) Give the relatives a life estate; 2) Own the cottage as a second home and let the relatives live in it; 3) Own the cottage in an LLC, charge the relatives rent of around $500/month, and forgive the rent each year; 4) Own the cottage in an LLC and charge no rent; 5) Lend the relatives the money to buy the house, take a first mortgage on the property, and forgive the payments each year; 6) Other options I'm not thinking of.

Any comments (in your spare time of course) would be appreciated.

[taxmandan]

I'm all for KISS

I would encourage #2 for that reason. Lending, borrowing, renting to or financing relatives eventually causes problems between the parties. If they want to turn over ownership to the others, then they should leave it to them in a will.

[taxcraft]

Relative Rentals must be FMV or no losses allowed.

Whatever they do, I believe, must be a flat out gift. No pay back expected.

[Burke]

I'm all for #2 as well. A life estate has value and can be used to determine Medicare and/or Medicaid eligibility. I figure Estate Tax is not an issue, but there too it enters into the calculation, mentioned here just for reference. Don't like #3 or #4. Can put it into a revocable living trust instead if they wish. Don't like #5 at all. Too many ramifications to mention.

[taxea]

I'm for #2 as well. Will it to the couple. Retain ownership and they can take the interest and property tax.