Location: Massachusetts
My mother lives in my childhood home where she has a reverse mortgage with a current payoff of ~$245,000. It's accruing over $1k/mo. The house value is over $500,000.
She wants me to inherit this house, and wants me to purchase it now, so that there's no risk of Medicaid taking it, and so that I can capture the current equity.
She would pay me $600/mo plus taxes and insurance. I would need to come up with ~$1000/mo. I could afford this.
We spoke to an elder law attorney who told us about the Medicaid 5 year lookback period. My mom is 70 and we feel that her needing dedicated care within the next 5 years is unlikely. She wants to take this risk.
I've never had rental property before. What would be the tax implications of this? Would I be potentially making a bad decision? Are we missing any potential pitfalls in this plan?
I'm interested in any and all thoughts! Thank you!
Potential tax implications of purchasing my mother's house and having her pay me rent to prevent Medicaid from taking it
byu/codeQueen intax
Posted by codeQueen
8 Comments
I’m still learning, not an expert, so take what I say with a grain of salt. Would appreciate any more experienced professionals to chime in
The biggest issue with your plan would be that you’d have to report the rental income and pay taxes on it. There are definitely better ways to go about this that you should consult with an attorney about. I’m specifically thinking about some sort of irrevocable trust that would allow your mother to continue living there without counting it as an asset to her. Bring this up with an estate planning attorney and see where it gets you. I’m a little surprised the one you spoke too didn’t mention anything like this.
Also, what do you mean by “capture the current equity?”
The look back is your biggest issue. Given your numbers she would net about 250K. They would want to know where that money is if it “disappears” before she files for Medicaid.
Look back is going to be your biggest unknown. Which is why it exists. People aren’t likely to give up control of assets willingly and they know this, thus the rule.
Aside from the issues previously mentioned, there may be tax issues if you are renting to her at below market rent for that area. That would make the rent payment taxable, but limit how the expenses could be deducted.
I wouldn’t bother renting. You biggest problem is the look back.
You’d (probably) be better off having the house in the trust, and getting the stepped up basis when she dies. You would be giving her 1k a month. Which is what you’re actually doing under the rental plan.
The rental isn’t likely to be at arms length, so it may not be fully deductible. Realistically, you won’t be evicting your elderly mother.
Plus, unless you have other passive income to offset, you’re just stuck with a rental losing money month over month, to pay more taxes once you’re able to sell it.
Agree with the above posters on this – the big issue is lookback, and there isnt much you can do to avoid that. But you sound as confident as you can be that she’s in good health now, I’ve spoken with folks who waited until they basically had no options. Well done on at least thinking a little bit ahead.
Reverse mortgage is probably not great if someone is committed to passing on their property but circumstances can force this sometimes.
The rent seems secondary but another poster had a good point – if you rent to her below market you’ll likely lose rental deductions, but that doesnt sound like a big deal for you
Yes, it would.
But, unless you pay fair market value you haven’t really avoided the Medicaid look back problem.
If she does need care within five years, she will be subject to a penalty period.
I understand she is OK with the risk, but are you? How will she get the care she needs if she doesn’t qualify for Medicaid?
Why shouldn’t your mothers assets be used to pay for her care? It seems you are trying to have the taxpayers pay for your mothers care while you inherit an asset with about 250k of equity that could be used to pay for her end of life care. Am I missing something?