Help a Reader: Moving in with In-Laws

Here's an email I received from a reader:

I was wondering what your thoughts are about moving in with your in-laws and its tax ramifications?

My wife and I are in our late 20's and we have a 2 yr old child. We live in a townhome and are planning to move into my in-laws house. It has a two fold purpose, they were willing to help out for childcare and we in turn will take care of them as they get older. We plan to rent out our townhome in the meantime.

Are we considered homeless then? What will be our tax ramifications?

Anyone know anything about this situation?

Comments

[nooney]

I wouldn't do it.

[Apex]

Other than the good advice from the previous poster not to do it, I don't see why this would have any tax ramifications at all other than the fact that your current house as a rental would move from a personal deduction to an investment deduction and income reported on schedule E.

The fact that you don't own a house you live in or rent a house is irrelevant to your taxes. You would just report your income and have no mortgage interest deduction on your itemized deductions (as per above, that all moves to schedule E).

But I would definately encourage you to rethink this idea. Unless its being done because its a financial necessity, emphasis on necessity, I would not do it.

I'm not sure why one thinks there are tax ramifications, unless you plan to claim your parents as dependents or are paying for their mortgage and want to see if you can deduct the interest, etc.

Obviously, the other considerations are far more personal. The one thing I'd suggest is setting expectations well, especially about the possibility that this doesn't work out. It's all well and good to enter into such an arrangement. But you are talking about a potentially long period of time. So I'd clear the air a bit about the "what if..." scenarios a bit.

[Melissa]

I'm a woman in my mid-twenties with a similar issue. I am living with my parents, but own a home that I'm currently renting out. You'll have to claim income from your rental on your taxes, but you'll also be able to deduct expenses such as mortgage interest, depreciation, cleaning, and other expenses associated with renting. Please check with a tax advisor for information in your particular situation (their fee should also be tax deductible).

Don't forget that if you filed for homestead exemption, you'll need to change that, so your local taxes will likely increase. And insurance on your townhome will likely be higher as a landlord than if you were living in it yourself.

Personally, I think you'll come out ahead renting your townhome and living with your in-laws even if your taxes are a little higher. Just think of all the daycare savings! However, I've also been in a situation caring for elderly family members, and although I know you want to be there for your in-laws yourself as much as possible, make sure you put aside some savings or have really good insurance to help care for them in the future. If they need hospice care (which can be done in their home) or other serious medical assistance it's much better to be able to have professional help. But even then, it's much easier to care for the elderly if you're living in the same home as they are.

[Mr. ToughMoneyLove]

What a story - gain a rental home - lose a life. If in-laws become ill, demented, or just plain ornery and stubborn, they will have 3 children, all being cared for by them in a home they don't own. Heavenly. There are much better ways to handle that problem than to surrender your independence in your 20's.

[Kevin M]

The only issue I see from the brief discussion is your current townhome being converted from your principal residence to a rental property. Like others have said, any income and related expenses would then be reported on Form 1040, Schedule E. Make sure to take depreciation on the rental, as that will cut your income and thus save you tax dollars.

Caveat: Due to recent law changes, you will likely lose some of your $500k exclusion on sale of a principal residence when you go to sell the townhome. However, if you're planning on renting it out long term, that would be the case anyway.

Another issue I could forsee is if you begin paying over 1/2 the support of your parents and they don't make a lot of income. You might then be able to claim them as dependents.

I would advise you to find a CPA in your area that will sit down and explain these issues further. It would probably be in your best interest to pay someone to do your return since it is getting more complicated than just a couple W-2s and home related deductions.

[LC]

I think this could be a great idea for everyone provided that expectations are clear from the beginning (and I am also in my 20's with a child on the way). The kids get to be around their grandparents, you get "free" childcare, and you are able to help out your parents when they need it. Not to mention the extra income and saving money by running one household. The people who advise against it may not have such a good relationship with their parents or in laws. I would make sure to keep your finances separate, and there shouldn't be any tax ramifications. You would continue to file with your wife, and your in laws would file on their own. Things to consider financially:

1) Claim the rental income but deduct any rental expenses.
2) Are you going to pay rent to your inlaws? Are they going to claim it as income?
3) If you pay your wife's parents for child care, you can do it out of a day care spending account if you are eligible for one at work, to pay them with pre-tax dollars. It doesn't matter that it's a family member (unless it was an older sibling watching them). If they won't accept rent or payment but you still want to give them something, maybe they will accept this arrangement. We plan to do this with my in-laws but not live with them.

Good luck and I'm sure everything will go smoothly.

[Bill]

The biggest downside I see is that you are trading a known for an unknown. Your child will need daycare all day for a few years and then will need after school care and then just some watching here and there while you and the spouse go out. The "costs" are known (assuming the # of kids is fixed or known). Taking care of your in-laws in old age is a complete wildcard. You or they may need to move. They may die quickly or outlive you even. They may need many years of care that you may or may not be able to provide. Even just shuttling them from place to place (Dr. appointments galore) can get very tiring and costly. Dementia can leave you caring for someone for 10-20 years. Then at what point can they go into a nursing home.

Not to say it cannot or should not be done, but you are trading costs that are not equal and cannot be compared in any real sense. Paying thenm for daycare now and doing what you can when they get older may be the only fair way for this to work.

[Amanda]

It's generally a very bad idea to have grandparents provide daycare. Will they follow your parenting decisions? Will it be awkward to discuss things you are uncomfortable with them doing? Are they up-to-date on the current safety recommendations or willing to listen/learn?

Unless it is a dire financial need, I would rent a small apartment (babies don't take up much space) rather than move-in with in-laws. Very few relationships survive such close quarters.

[aaktx]

I find the responses amusing and clearly very American. These people are your family and are offering you a good deal. It is common pretty much everywhere else in the world for extended families to live together. The major issue is can you get along with your in-laws?

[Sarah]

Actually, they just did a study showing that children whose caregivers were grandparents were less than half as likely to suffer injuries than even children whose caregivers were stay-at-home parents!

http://well.blogs.nytimes.com/2008/11/04/kids-safest-under-grandparents-care/?scp=2&sq=grandparents%20childcare&st=cse

The main concern I would have here is thinking through all the possible scenarios and making expectations crystal clear, especially considering how far you are looking ahead. Your in-laws might die in a car accident ten years from now, or they might end up requiring round-the-clock care for years. Are you prepared to take that on? Do they have long-term care insurance to help you with that? If not, is one of you prepared to give up his or her career for that length of time to provide that care? (Long-term in-home health care is extraordinarily expensive and is not generally covered by either regular insurance or Medicare. Being the fulltime caregiver yourself is extraordinarily physically and mentally taxing.) Are there circumstances in which it would be mutually acceptable to shift them to some facility, even a nursing home? What if one of them dies, and the other remarries? I am not saying this can't work--as others have pointed out, this is a very common arrangement in other parts of the world (and in previous generations in the U.S.). I am just saying that you need to go way beyond assurances of "taking care of them someday" so that no one ends up feeling deceived or used.

[Kevin M]

Amanda -

Not a good idea to have grandparents provide daycare? So you'd rather have a bunch of complete strangers watching your kid (and several others at the same time)?

(By the way, our son goes to his grandparents every Tuesday and to the preschool where my wife works 2 days a week.)

[Krazy Eyes]

Personally, I'd be worrying about the sex ramifications over the tax ramifications. I'd recommend getting your own place close to the grandparents.

[Leia]

If you are still paying a loan on your townhouse, you may have to renegotiate the loan if you rent it out. There are differences between homeowner loans and commercial loans.

I've never seen a situation with a family moving into their parents' house that works out without some resentment and rubbing the wrong way after awhile - especially if the kitchen is shared.

Just saying. ;) Obviously you do what you have to, but the first paragraph is the kicker.