Buying parents house and they live rent free

I would greatly appreciate any advice/ideas from forum members - especially those have either done this before/set it up for others...

The situation is:

My wife's parents are both around 65 and would like to retire. They have very little by way of Super ($30k). They have a home worth $300k, no bank mortgage, but owe approx 150k to another family member (my Wife's uncle). The uncle needs his money so they have approached us to help out.

What they have proposed to us is that we give them $150k, they then repay the Uncle the money owed. They then transfer the title to the house to our name (100%) on the understanding that they are permitted to live in the house "until they die", they will pay their own upkeep/outgoings, but not pay any rent to us. So putting it simply, we buy the house at half its value but in return forgo receiving rent payments.

Options to effect this that I can see are:
1)option as proposed
2)they could leave the house in their name, but write in their will for my wife and I to receive it when they die
3)we could loan the money to them, but not require ongoing interest payments, instead capitalising the interest payable (basically a reverse mortgage) - only capping the loan amount (principle + interest payable) at the house value at the time of their passing. (to avoid the loan becoming higher than the house is worth)

We keen to help and have the money available to help them out in our family trust, and are just looking at the best way to structure this, avoiding impacting their pension eligibility, and our tax position.

Given the above, do you have a view on which of these (or an alternative) is the best option?

many thanks for any thoughts/ideas..

 

are they eligible for the age pension? I don't want to say too much because I am not well versed in regards to the pension, but by 'gifting' the house to you for that value it may be seen as deprivation.

i.e. the $150,000 that they're effectively giving you would end up being deemed an income producing asset and could lower their pension entitlement.

As I said though, I am no expert. I hope that this will prompt someone to jump in and correct or verify me

 

if you have enough money, could you not offer them the $300,000 (or around that figure) for the house, with which they will pay rent back to you from. Obviously rent is never going to amount to the $150,000 difference so whatever the remaining figure is they could leave to you in their wills.

You could effectively treat the home as an investment property.

 

I don't think so. Centrelink has what they call a Granny Flat Arrangements which basically recognise that they are not gifting the $150k, but are exchanging it for a life time interest in the property in the form of the right to live there rent free. So I do not think it impacts their pension..

 

I think this would cause a problem with their pension. In effect they would receive $300k from us, or $150k after clearing their debt, leaving $150k as an investment asset which would be assessed for their pension, although they may then qualify for rental assistance which could offset this to some degree.

Also I think they and I would prefer to avoid the hassle of paying/collecting rents for the next 30 years!

but thanks for the ideas, ....

Does anyone know how the Trust's CGT position would be handled in the future? Is an asset owned under the Granny Flat Arrangements considering income producing and subject to CGT? If so, what is the cost base?

I think I am leaning toward the basically providing a reverse mortgage - it leaves the asset in their hands and is v simple. Against it may be that the Trust's tax position may be suboptimal - under a reverse mortgage I assume the capitalised/unpaid interest on the loan would not trigger a tax event for the trust until the principle & interest are repaid (hopefully many years from now!). But when the tax is payable, the accumulated interest would be considered as income not capital gain so would not benefit from 50% CGT relief? (I'm realising as I'm writing this that who knows whether the tax treatment possibly 30 years from now will even vaguely resemble todays rules!)

 

One of the areas I work in is with seniors.
This is becoming a more common problem and there are a number of ways to tackle it depending on your end goals and the amounts involved.
One very helpful source in relation to pension entitlement is the Centrelink Financial Service Officers who will give 'advice' or at least the implications of various actions.

Selling and downsizing is an option but often an expensive one and from what it sounds like, your parent-in-law will not have enough equity to downsize. They could rent however and there is rental assistance from Centrelink. If they sold, the net funds (after paying the uncle) will be lower than the Assets test threshold (depending on other financial assets), so they may still receive the full pension. This option may be the cleanest, where it is a full sale and they rent, whether you and your wife buy this property and rent it back to them or they rent independently is another issue. I have a client considering this exact issue right now and it is likely that the mum will sell the family home (too hard to maintain) and move into a unit purchased by one of the children. Benefits are to both as rental continuity and looking after the property and ownership continuity (owner not selling) etc.

The selling of the property and using a lifetime interest is a possibility but will attract stamp duty on transfer. You will need advice on sales value for this.
I would be careful about the will aspect as wills can be challenged. If you are the only beneficiaries, okay but if there is more beneficiaries it can be difficult in future years. Also what happens if you are your wife separate for some (unknown) reason in the future.

I deal with reverse mortgages a lot and the RM idea for that value $150k may not stack up. As an aside, the maximum banks will lend to a 65 year old tends to be 15% to 20% of market value (not all but most). At 7% the RM effectively doubles every 10 years (depending on interest rate) and if capital growth over time is around 4% pa, in just on 20 years the debt becomes greater than the market value. MY understanding is that the interest, even if capitalised, would be regarded as income for the trust in the year it accrues. The trust will have interest income but no cash.

You have not provided enough details of your trust position, A&L etc to give a definitive answer but for simplicity, I would look to purchase outright at market value (in your name or the trust is another issue) and the parents rent at market rates. It then gives the parents future flexibility and funds to live their retirement lives with.
If you need more, let me know
Greg