The Big Move: My mom, 76, is in assisted living and owns a rental home. How can we use it to fund her long-term care — and reduce capital gains?
My mother moved to an apartment from her house in 2014 and started using the house as rental property. She bought it with my father in the 60s, and she bought part of it from him after they divorced in the 70s. I don’t know if I have documentation of any costs, but I think they originally bought the house for around $30,000. It is worth around $230,000 today.
In 2020, my mother moved into assisted living, so her spending has increased. She only makes about $35,000 annually now. Looking at my mother’s finances, I estimate that she’ll probably spend all of her savings by 2032 and need to sell the house to pay her personal expenses. I’m wondering if there’s something we can do now to reduce the capital gains on the house later if she does outlive her savings. She is only 76 now, but she has below average health. Now that she has moved to assisted living, she is doing much better. It’s difficult for me to determine if she will live until 2032, but it seems very likely.
Do you have any suggestions to reduce taxes on the sale of the house or when to plan to sell it? If she gives the house to us, we’d still owe the capital gains if we sold it. Are there other ways to add to her savings using the house? I feel like vacation rentals might bring more income, but the house is not in a great neighborhood for that (and we’d have to furnish the house). Could she get a home equity line of credit and invest the money? If she sells the house to pay for assisted living, is she able to get a tax credit? Could she be getting a tax credit today to reduce her income tax from the rental income?
Although this might not work for my mother, I wondered about this concept. Is there a way to divide a house into shares and sell individual portions on your own schedule? I don’t know if there is an advantage to that for her other than spreading out the number of years that she pays capital gains, but I’m curious if it’s even possible. Would she have to make an agreement with a company that does that type of funding or could we set up something on our own and sell shares to ourselves and others? Would it be really difficult to sell later if there are multiple owners?
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For folks with aging parents, navigating the complicated web of their assets and figuring out how to offset the expenses associated with long-term care can be a significant challenge. I am glad to see that you’re asking these questions and planning now, rather than waiting until all of her savings have been exhausted to tackle this important issue.
Indeed, all of us should be thinking about our eventual long-term care needs. Research has shown that only 1 in 5 Americans who are 65 years old won’t need long-term care services, whereas a quarter of retirees have a “severe need” for this help.
You’ve asked a bunch of important questions, so I want to address each one individually. To start: you’re right to be thinking about the capital-gains taxes involved in selling your mother’s former home. When she converted it into a rental years ago, the home became an investment property as opposed to her primary residence. As a result, it won’t qualify for the exclusion people can get if they sell the home they were living in (for at least two of the last five years.) Under that allowance, the Internal Revenue Service excludes the first $250,000 of proceeds from a home’s sale (based on the original purchase price) for a single filer, or $500,000 for a married couple filing jointly.
For that reason, you should do everything you can now to keep a running tally of your parents’ investment 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 eventual sale’s proceeds to reduce the amount that’s taxable.
If you’re primary goal is to avoid seeing your mother’s investment in the home gobbled up by the IRS, you might want to consider a 1031 exchange. Under the tax code, investors can avoid capital-gains taxes on the sale of a home if the funds are reinvested in a similar property. There are specific rules you need to follow to take advantage of this loophole — for instance, the purchase of the new property must be completed within 180 days of the original home’s sale.
Going this route could prove useful if you decide to use an investment property to help fund your mom’s long-term care. You mentioned that the area she lives in isn’t ideal for vacation rentals — and I assume that the income she is receiving from her current tenants isn’t enough to pay for her assisted-living costs plus the home’s maintenance. So perhaps you could sell the family home and then reinvest the proceeds into a rental property that will generate a better return.
Another option, similar to what you described at the end of your letter, would be an installment sale. 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 handing over a lump sum at closing.” Those payments can be dictated by terms set in a deed, contract or mortgage. This method can allow the seller to reduce or defer their tax liability for the sale’s proceeds by spreading it out over multiple years.
Ultimately though, my strongest advice would be to work with a lawyer, financial planner or accountant who specializes in elder care. Sure, you could get a home equity line of credit eventually to help pay for her care. But that’s still a loan that you would need to eventually make monthly payments on — not to mention the interest payments and fees involved.
Your mother may eventually need to rely on Medicaid for funding her long-term care, especially if she didn’t purchase insurance. Medicaid will allow a retiree to own a home and receive benefits, but it could put a lien on the home if she were eventually to move into a full-fledged nursing home. She may want to place the home into an irrevocable Medicaid trust.
As the American Council on Aging explains, “these trusts protect a Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home.”
Homes put into trusts can still be sold, and they will receive the same tax treatment as usual once passed onto heirs. Time is of the essence though: Medicaid rules do vary from state to state, but generally Medicaid employs a five-year “look-back” period and establishing a trust within five years of your mother seeking eligibility for the assistance could be a violation of the eligibility rules.
An elder law attorney or financial expert can walk you through the steps to figure out the best of these routes for you to take. Plus, they can advise you as to any tax deductions your mother might be able to claim vis-à-vis her assisted-living care. While the process may seem daunting, starting now is the right thing to do. I wish you and your mother the best of luck in navigating these choices.
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