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I've grown up in my grandparents house my entire life. They lived two miles away my entire life. Sleep overs, dinners, barbecues, etc.

It's been the plan since I was a kid to buy the house when I got older.

The house is a 4-bed 2-bath, and it's getting to be too empty for them.

They've lived in the house for nearly thirty years. The value of the house is about $340,000. They have about $160,000 left on the mortgage.

They came to me with a proposition for me to buy the house for less than market value, and take the difference, buy a trailer and put it on another piece of property they own and live there.

The current proposition is that I get a mortgage for less than the current market value of the house, probably about $260,000. They then sell me the house for that amount. They pay off the $160,000 mortgage, and take the remaining $100,000 to get them setup on their other property (buy a trailer/fifth wheel, garage, carport, etc).

Are there any concerns with this plan? Do they have to do anything special to facilitate this? Do I?

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This is a pretty common situation, so not too much fuss involved. Most lenders will have have no issue with counting an equity gift as down-payment and since the difference between value and mortgage amount is more than 20% of value you likely won't need any cash for down-payment. Your grandparents will have to report the gift ($80k in equity) via Form 709 on their tax return (pertaining to gift tax) but will incur no tax liability unless their lifetime exemption has been utilized ($10M + inflation adjustment as of 2018, double for a couple if split gifting).

The only other consideration (not a downside at all) is that your basis for capital gain is now much lower, so when/if you sold, there's an outside chance you'd face some capital gains tax. Currently the first 250k of gain on primary house sale is exempt from capital gains tax (500k for a couple), and it's only the gains in excess of those amounts that are taxed.

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    The amount you can get in a HELOC may depend on the sale price in the first year. – Eric Feb 1 '18 at 2:30
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    We spoke to a lawyer, and it turns out that if we went this route, then they would be ineligible to use Medicaid for a 5 year period. From the State's perspective, they shouldn't have to fund someone who threw away a significant portion of assets (because they could have used those assets for health related care, instead of turning to Medicaid). – user27283 Feb 27 '18 at 19:33
  • @Zymus That's an interesting follow-up item, thanks! Did this create an issue in your case? – Hart CO Feb 27 '18 at 19:37
  • @Zymus It looks like at 80k of transferred value it coudl be quite a bit less than 5-years based on this: elderlawanswers.com/medicaids-asset-transfer-rules-12015 – Hart CO Feb 27 '18 at 19:45