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We're trying to figure out the best strategy for buying our next house. We are moving from Illinois to Massachusetts, and we will be purchasing a house in the new location before we are able to sell our current house. (Why is a long story.) Although houses are more expensive in MA, we can afford what we want, but not while continuing to pay for our current house.
My mom retired and moved in with us about a year ago (and will be moving with us). While she hasn't contributed to housing costs over the past year, she is willing and able to help out in a way that makes the most sense for all of us when we move. (She only has SS income, but she has a significant amount of cash she inherited from her parents. She is extremely conservative financially and will only invest this money in the most secure "investments" and so gets almost no interest on it currently.)
Which of the following scenarios make the most sense? Are there legal or tax implications for them that I should take into account?
Scenario 1 -- My mom formally loans us the money for the new house, and we pay her back over time with interest. I guess we would have an attorney help us write up something formal. I think she would have to declare the interest as income on her taxes? Could we deduct the mortgage interest we pay?
Scenario 2 -- My mom pays off our current mortgage so we are financially free to qualify for the new house on our own. Once we sell the current house, we pay her back out of the proceeds.
Scenario 3 -- My mom buys the new house, and we pay her rent to live with her, or we rent to own.
We're trying to figure out the best strategy for buying our next house. We are moving from Illinois to Massachusetts, and we will be purchasing a house in the new location before we are able to sell our current house. (Why is a long story.) Although houses are more expensive in MA, we can afford what we want, but not while continuing to pay for our current house.
My mom retired and moved in with us about a year ago (and will be moving with us). While she hasn't contributed to housing costs over the past year, she is willing and able to help out in a way that makes the most sense for all of us when we move. (She only has SS income, but she has a significant amount of cash she inherited from her parents. She is extremely conservative financially and will only invest this money in the most secure "investments" and so gets almost no interest on it currently.)
Which of the following scenarios make the most sense? Are there legal or tax implications for them that I should take into account?
Scenario 1 -- My mom formally loans us the money for the new house, and we pay her back over time with interest. I guess we would have an attorney help us write up something formal. I think she would have to declare the interest as income on her taxes? Could we deduct the mortgage interest we pay?
She would only pay taxes on the profit. Yes as its a loan, you can deduct
Scenario 2 -- My mom pays off our current mortgage so we are financially free to qualify for the new house on our own. Once we sell the current house, we pay her back out of the proceeds.
Sure that's doable. You should have something written up though.
Scenario 3 -- My mom buys the new house, and we pay her rent to live with her, or we rent to own.
I would only do that if you bought the house after selling yours. But can she qualify? They do look at income and cash reserves. If the numbers make sense and DTI is under guidelines you'll probably get it.
Thoughts on any of these options?
IMO the best way is to have mom pay off your house. Draw up a agreement that you are going to pay her back and put her name on the deed. If you and your wife kick the bucket she would have a leg to stand on in court if you have no will/trust. If you do designate some of the proceeds to pay her back.
Thanks! I appreciate your insight. I hadn't thought about needing to have something written down for option 2 in case we die. That makes a lot of sense.
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