Is Daughter's Plan to Help Mom
Save Her Home Fair to Siblings?

Question: My mother lives in Westchester County, N.Y., in the home where she raised her family. She doesn't want to move, but can't afford the maintenance and taxes. My sister proposed buying it at a price substantially below market value. She says she'd let our mother live in the house rent-free. Mother would pay her bills with the money she receives from my sister. When she dies, any money that's left over would be split between my brother and me.

I feel hurt that my mother is considering selling to one sibling at far below market value. Wouldn't it be fairer to have my mother take out a reverse mortgage and live off the home's equity? Are there serious tax considerations?

Answer: Fairer to whom?

It's natural for you and your siblings to want to preserve your inheritance, as well as family relations. From this standpoint, the deal your sister proposes isn't equitable, according to New York certified public accountant Martin Weinberg. "She's getting something over the other two kids," he says.

But it's your mother, not any of you, who owns this house and has the pressing financial problem. It no doubt is causing her many anxious moments. So I suggest you leave hurt feelings at the door and focus on helping her resolve it in a way that serves her interests first.

Your sister has suggested one way to provide your mother with immediate cash and allow her to stay in her home for the rest of her life. No doubt your mother is relieved to have this offer, but it could create problems for her in the future. For instance, if she develops a chronic illness, having a large stash of cash on hand might disqualify her for Medicaid or other forms of governmental assistance. Your sister's proposed solution doesn't address what will happen to your mother should, over time, her bills exceed her income from the sale of the house.

You didn't mention what your mother's home is currently worth, or what she paid for it when she bought it. So let's assume that it's worth $635,000, the median sales price for a home in Westchester County, according to the local multiple listing service. Let's also assume she bought it for $60,000 many years ago and put in $150,000 of improvements over the years. If she sells the house at full market value, she can deduct these expenses, leaving $425,000 in taxable equity. As a single person, $250,000 of this gain is excluded from taxes; the rest, or $175,000, is subject to a 15% capital gains tax. Selling to your sister for, say, $400,000, would eliminate her having to pay capital gains tax, but it would also significantly reduce the amount of cash she'd get for her biggest asset; and it would also reduce the amount of money she'd be able to give to others after her death.

There are other options. As you mention, one is a reverse mortgage, but bear in mind that it's not free. The bank charges interest in exchange for providing your mother with income, and both principal and interest are charged against the home's accumulated equity. This debt must be repaid when the home is sold. The American Association of Retired Persons has comprehensive information on reverse mortgages on its Web site.

Another simple option is for you and your siblings to contribute to a common fund to pay for your mother's expenses and not change ownership while she’s alive. When your mother dies, you will all inherit the house at the home's market value on the day of her death, which eliminates any of you having to pay capital gains taxes. The three of you can then sell the house and be reimbursed for whatever each of you spent on your mother's care. Whatever funds remain can be disbursed equally.

Even that option may not be the best for your family. I urge your mother to visit a good accountant familiar with eldercare issues who will help her figure out what to do, and to make sure her wishes are spelled out in a will.

-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Mondays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

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