My mom, 76, lives with assistance and owns a rented house. How can we use it to fund her long-term care — and minimize capital gains?

My mother moved into an apartment from her home in 2014 and started using the house as a rental property. She bought it with my parents in the ’60s, and bought a part of it after their divorce in the ’70s. I don’t know if I have documentation of any costs, but I think they originally bought the house for about $30,000. It’s worth about $230,000 today.

In 2020, my mother moved to assisted living, which increased her spending. She now only earns about $35,000 annually. Looking at my mother’s finances, I estimate that she will likely spend all of her savings by 2032 and will need to sell the house to pay for her personal expenses. I wonder if there is something we can do now to reduce the capital gains on the house later if it exceeds her savings. She is only 76 years old, but her health is below average. Now that I’ve switched to assisted living, it’s doing much better. It’s hard for me to say if she’ll live to 2032, but it seems very likely.

Do you have any suggestions for lowering taxes on the sale of a home or when you plan to sell it? If she gave us the house, we would still owe the capital gain if we sold it. Are there other ways to increase her savings by using the house? I feel vacation rentals might bring in more income, but the house isn’t in a great neighborhood for that (and we have to furnish the house). Can she get a line of credit to buy a house and invest the money? If she sells the house to pay for living expenses, can she get a tax exemption? Can You Get a Tax Credit Today to Lower Your Income Tax From Your Rental Income?

Although this may not work for my mother, I questioned the concept. Is there a way to split the house into shares and sell individual parts on your own schedule? I don’t know if there is an advantage to it other than a distribution of the number of years you pay capital gains, but I’m curious if that is possible. Will she have to make a deal with a company that does this kind of financing or can we create something ourselves and sell the shares to ourselves and others? Would it really be difficult to sell later if there were many owners?

sincerely,

Oh son, worry

“The Big Move” is a MarketWatch column that researches the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next step should be? Email Jacob Bassi at [email protected]

dear concern,

For people with elderly parents, navigating the complex web of their assets and figuring out how to offset the expenses associated with long-term care can be a major challenge. I’m glad to see that you’re asking these questions and planning now, rather than waiting until all of your savings have been exhausted to tackle this important issue.

In fact, we should all be thinking about the ultimate long-term care needs. Research has shown that 1 in 5 Americans 65 years of age will not need long-term care services, while a quarter of retirees have an “urgent need” for such assistance.

You asked a bunch of important questions, so I want to address each one individually. To start: You are right to think about the capital gains taxes involved in selling your mother’s former home. When she turned it into a rental years ago, the house became an investment property as opposed to her primary residence. As a result, they will not qualify for the exclusion that people can get if they sell the home they’ve been living in (for at least two of the past five years.) Under this allowance, the Internal Revenue Service excludes the first $250,000 in proceeds from the sale of a home (based on Original purchase price) for a single applicant, or $500,000 for a couple applying together.

For this reason, you should do everything you can now to keep a constant tally of your parents’ investments in the home, from the cost of any improvements to the ongoing maintenance the home needs. The cost of these repairs and improvements can be deducted from the final sale proceeds to reduce the taxable amount.

If your primary goal is to avoid seeing your mother’s investment in the home gobbled up by the IRS, you may want to consider a 1031 exchange. Under the tax code, investors can avoid capital gains taxes on a home sale if the money is reinvested in a similar property. There are specific rules you need to follow to take advantage of this loophole – for example, the purchase of new property must be completed within 180 days of selling the original home.

Following this path may be beneficial if you decide to use an investment property to help finance your mother’s long-term care. You mentioned that the area you live in is not ideal for vacation rentals – and I assume that the income it receives from its current tenants is not enough to pay for living costs as well as home maintenance. So perhaps you can sell the family home and then reinvest the proceeds into a rental property that will yield a better return.

Another option, similar to what you described at the end of your post, is to sell by installments. According to Concannon Miller, an accounting firm based in Pennsylvania and Florida, in these transactions “the buyer makes payments to the seller over time, rather than delivering a lump sum at closing.” These payments can be dictated by specific terms in a contract, contract, or mortgage. This method can allow the seller to reduce or defer his tax liability for sale proceeds by spreading it over several years.

My strongest advice, though, is to work with an attorney, financial planner, or accountant who specializes in aged care. Sure, she could eventually get a home equity line of credit to help pay for her care. But this is still a loan that you’ll eventually need to make monthly payments on — not to mention the interest payments and fees involved.

Your mom may eventually need to rely on Medicaid to fund her long-term care, especially if she didn’t buy insurance. Medicaid will allow retirees to own a home and receive benefits, but can place a mortgage on the home if she eventually moves into a full-fledged nursing home. You may want to put the home in an irrevocable Medicaid fund.

As the American Council on Aging explains, “These funds protect the Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables a person who may not be eligible for Medicaid to become Medicaid eligible and receive the care they need at home or in a nursing home. the elderly.”

Homes placed in trusts can still be sold, and you’ll receive the same tax treatment as usual once passed on to heirs. Time is of the essence though: Medicaid rules vary from state to state, but in general, Medicaid uses a five-year “review” period, and establishing a trust within five years of your mother seeking eligibility for assistance may be a violation of the eligibility rules .

A senior legal attorney or financial expert can walk you through the steps to find out which is the best way to go. In addition, they can advise you about any tax deductions your mother may be able to claim in exchange for her care of a living. While the process may seem daunting, getting started now is the right thing to do. I wish you and your mom all the best in navigating these options.

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