Do you have older parents living in a house that has appreciated in value and who can no longer reap the tax breaks of homeownership? Consider buying their house and renting it back to them. All of you will benefit.

 If your parents’ mortgage is paid off or if they are only making payments on principal, their tax bracket might be so low the mortgage interest deduction doesn’t matter. Chances are they don’t have enough deductions to beat the standard deduction amount and don’t itemize. Mortgage interest paid then is of no tax savings value to them.

In this situation, you and your parents will benefit from a sale/leaseback. By selling their home to you, your parents will gain cash without needing to refinance their home or get a home equity loan. And, by your leasing the house back to them, they don’t have to move. You, as the buyer and landlord, gain the tax benefits of owning rental property.

 Make sure you pay a fair price for the house and support that price with a qualified and independent appraisal in order to avoid any gift-tax complications.

A word of warning: You can reduce the fair-market rent by 20% when renting to relatives. If you set the rent too low, the IRS can claim the rental home is for your personal use and limit the deductions as if the property were a vacation home.

 Source: Small Business Tax Strategies, March 2010

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