Can you buy your parents’ house? The answer is yes! It may seem like a daunting task, but with the right knowledge and resources, you can make it happen. Not only is it a great way to keep the family home in the family, but it can also be a smart financial move. In this article, we will discuss the steps to buying your parents’ house, tax rules to keep in mind, and how a gift of equity can help you achieve a $0 down payment. We will also touch on how to avoid capital gains taxes. So, let’s dive in and learn how to make your dream of owning your parents’ house a reality.
Step 1: Have a Conversation with Your Parents
Before you start the process of buying your parents’ house, it’s important to have an open and honest conversation with them. This will not only help you understand their reasons for selling, but it will also give you a chance to discuss your plans and expectations. It’s important to make sure that everyone is on the same page and that there are no misunderstandings. This will also give your parents the opportunity to share any concerns or questions they may have.
Step 2: Get a Home Appraisal
Once you have had a conversation with your parents and they have agreed to sell you their house, the next step is to get a home appraisal. This will help you determine the fair market value of the house and ensure that you are paying a fair price. It’s important to get an appraisal from a licensed and certified appraiser to avoid any discrepancies.
Step 3: Consider a Gift of Equity
A gift of equity is when the seller (in this case, your parents) gifts you a portion of the equity in the house. This can be used as a down payment, which means you won’t have to come up with a large sum of money for a down payment. The gift of equity can also help you avoid private mortgage insurance (PMI) and lower your monthly mortgage payments. However, it’s important to note that the gift of equity must be documented and approved by the lender.
Step 4: Understand Tax Limits
When buying your parents’ house, it’s important to understand the tax limits. As of 2021, the annual gift tax exclusion is $15,000 per person. This means that your parents can gift you up to $15,000 each without having to pay any gift taxes. If the gift of equity exceeds this amount, your parents may have to pay gift taxes. It’s important to consult with a tax professional to understand the tax implications of the gift of equity.
Step 5: Get a Mortgage
If you are unable to pay for the house in cash, you will need to get a mortgage. It’s important to shop around and compare rates from different lenders to ensure you get the best deal. You can also consider getting pre-approved for a mortgage, which will give you a better idea of how much you can afford and make the buying process smoother.
Step 6: Avoid Capital Gains Taxes
One of the biggest concerns when buying your parents’ house is the potential for capital gains taxes. Capital gains taxes are taxes on the profit made from selling a property. However, there are ways to avoid or minimize these taxes. If your parents have lived in the house for at least two out of the past five years, they may be eligible for the primary residence exclusion. This means that they can exclude up to $250,000 of the profit from the sale of the house ($500,000 for married couples) from capital gains taxes.
In conclusion, buying your parents’ house can be a great way to keep the family home in the family and make a smart financial move. By following these steps and understanding the tax rules and benefits of a gift of equity, you can make your dream of owning your parents’ house a reality. Remember to have open communication with your parents and consult with professionals to ensure a smooth and successful buying process. Good luck on your journey to becoming a homeowner!