"Mother-in-law apartment"


D

Dan Listermann

My only-child wife's parents are 82 and in declining health. They own their
home. We are considering putting an addition on our home that they could
live in as long as possible. Ideally they could sell their house and use
the proceeds to finance the addition, but I am unsure of the tax
consequences. Would the money for the addition be considered a gift and
subject to taxes? Could they loan us the money? What would be the status
of this loan if they had to go to a rest home at the end?
 
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P

Paul

Dan Listermann said:
My only-child wife's parents are 82 and in declining health. They own their
home. We are considering putting an addition on our home that they could
live in as long as possible. Ideally they could sell their house and use
the proceeds to finance the addition, but I am unsure of the tax
consequences. Would the money for the addition be considered a gift and
subject to taxes?
It could be considered a gift, and a gift tax return may have to be
prepared, although there's a strong chance that there wouldn't be any tax
due.

Could they loan us the money?
Clearly the can, and most likely they should.

What would be the status of this loan if
they had to go to a rest home at the end?

As with anything else, it would be one of their assets. But so might the
gift to you and their daughter.

It is high time to seek local legal help (in what's called elder law) to
sort it all out before there is a problem. A few hundred now can save (or
make) thousands later.
 
D

Dan Listermann

What is the gift tax rate? Maybe I am worrying about something that is not
a big deal.
 
P

Paul A. Thomas

Dan Listermann said:
What is the gift tax rate? Maybe I am worrying
about something that is not a big deal.


It's a tad more complicated than that, but suffice it to say that the
parents can make gifts in the amount of $11,000 each to both you and your
wife before any gift tax applies. Total gifts from both of them to both of
you - $44,000. This can be gifted each year, for as many years as they have
money or assets. *There are some throw-back rules on gifts made prior to
going on the public dole (Medicare/Medicaid), so consult an attorney on the
elder laws that may impact the situation*.

Gifts made in excess of the $11,000 per year first reduce their estate
exemption (currently at $1,000,000 each. After that, then gift tax applies.
*Gifts in excess of $11,000 require a gift tax return to be filed even
though there would be no tax due.*

After that, the gift tax rates begin at 18% and climb to 50% I believe.

It's the person making the gift that is responsible for filing the gift tax
return and paying any tax due.


Now, there may be a reason to set things up as a loan, and in fact a
mortgage (secured by the house). You can deduct the interest paid, and your
in-laws can report the interest income. If they are in a lower tax bracket
than you two, then there is a tax advantage. *Be aware that higher income
may increase the taxable Social Security benefits they receive.* If the
loan is stretched out long enough, and the loan survives their life, then
you can inherit your own debt.

So, do some more research, especially in the areas of elder law, and the
potential tax issues for both parties, and then determine the best route to
take. I would suggest seeking competent legal and tax advice before
anything is done.
 
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D

Dan Listermann

Thanks a lot. I sent an E-mail to an elder law attorney just to touch base.
 

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