The Financial Implications Of Selling Your Parents Home

For many seniors, the majority of their wealth is tied up in their home. They’ve likely lived on the property for a long time, paid off or nearly paid off their mortgage, and their house has most likely increased in value. Since social security payments haven’t kept up with cost-of-living increases in most areas of the country, and people are living longer than they expected to, your parents might not have much in the way of other savings.

That means you must make decisions on how you handle the home wisely. Financial advisors recommend focusing on long-term problems like the cost of deteriorating health and daily care, while you’re trying to solve the near-term issues.

What is the Quality of Their Health Right Now?

Usually, the impetus for moving comes from a health or safety concern. Do one or both of your parents have trouble with stairs? Or is one of them showing signs of mental deterioration? If characteristics of the house, like stairs or a shower that’s difficult to get into and out of, present a danger to them, you could try to make improvements to make their home more senior-friendly. But that would be solving the short-term problem.

Eventually, the physical and mental state of your parents will probably require daily assistance.  Which means either a family member will need to provide 24-hour-a-day care, or you will need to hire a nurse or caretaker. If staying in the home is not a possibility, senior care specialists recommend moving your parents before their physical and mental health deteriorates. This will give them a chance to settle into a new life while they still have some memory and mobility.

Start the decision-making process by having a conversation with your parents. Voice your concerns about their health and safety, and ask them about their expectations for care and what their ideal scenario looks like.

In order to make decisions for your parents—like selling their home—you will need to be an authorized agent or given power of attorney in their will or trust. If you are selling their house and haven’t had this conversation with them yet, now’s the time. Ask what plans they’ve made in terms of a will or trust and ask who is authorized to act on their behalf should anything happen. Also, find out if they have an attorney.

What is the State of Their Finances?

In the absence of familial support, the options available to your parents will depend on their savings. If your parents are like most seniors, the majority of their savings is tied up in their home equity.

The first course of business is to ask for their latest bank and mortgage statements. Ask to see the loan documents if they still have them; if not, call the mortgage company and ask if there is a pre-payment penalty for paying their mortgage off early. Also ask if there are any other loans on the property. Even if the original mortgage company didn’t make subsequent loans to your parents, it would have been notified if another lender did.

Then hire a real estate agent to give you an estimate of current market value. Ask the agent what upgrades they advise and the estimated increase in sales price these upgrades would garner.

If both of your parents are still alive, and decide to sell their home, they will pay capital gains taxes on any profits from selling their home. If one parent has passed away, the deceased spouse’s half of the ownership gets transferred to the surviving spouse at current market value. Since the IRS allows a deduction of $250,000 of mortgage profits when you’ve owned and lived in your home for longer than two years, it’s likely your surviving parent will owe little if any capital gains tax.

Get the Advice of a Financial Planner

Once you’ve gathered all of the information, take it to a financial planner. They will tell you whether you should sell the house now and move your parents to a smaller, more senior-friendly home, or if an assisted living facility would be a wiser choice given their health and the cost of 24-hour nursing.

If your parents’ goal is to stay in their home, a financial planner will tell you how long they’ll be able to do that. If most of their savings is in their home, they might not be able to stay for long.

What About Renting the Home?

If the capital gains taxes would be onerous and your parents’ home is in good condition, renting it out might be a viable option. Ask the real estate agent what updates you’d have to make in order to make it attractive to renters. Also, ask for an estimate on monthly rent. In order for this scenario to make sense, the following would have to be true:

  • The monthly rent you get would cover the property taxes, mortgage payment, homeowner’s insurance, utilities, and your parents’ expenses.
  • A family member is available to manage the rental.
  • In the absence of a family member, the rent would also cover the cost of professional property management.

Important Decisions When Selling A House That Is Not Yours

Before you make any decisions on what to do with your parents’ home, you should collect information on their complete financial picture. Talk to their doctors about their health prognosis and get advice from a real estate agent and financial advisor. Selling your parents’ home will likely be an emotional time for you and for them, so you want to make sure it’s the best thing you can do for the family.