My sister wants to buy our impoverished brother’s house. Is that a bad idea?

My brother wants to sell his home to my sister, because his health has been in a sharp decline and he can’t afford maintenance and many of his bills. We have been helping him out financially for many years, with our sister helping the most.

She will let him live there for free and continue to take care of the maintenance. Presuming he passes on before her, which is more than likely, she could deduct the expenses from the sale of his home.

Her only concern is that it will show up as an asset or rental property on her end. What would be the best way to handle this from a financial point of view?

The Other Sibling

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This all sounds terribly fraught and complicated.

Buying your brother’s home is probably not a good idea if your sister is concerned about taxes, or if he is worried about Medicaid. Medicaid generally has a lookback period of five years to review asset transfers. Instead, she could give him a loan, which is notarized and witnessed.

If he sold the house to her, he would have money in his bank account when he passes away. Whatever he did not spend during his lifetime would be passed down to his heirs. If he doesn’t have children, that would be his parents and siblings.

A solid loan agreement, if they went that route, should be witnessed and notarized, which would help if there was a legal dispute. It should also have a real interest rate, payment schedule, and be structured to avoid Medicaid problems.

Medicaid scrutiny would also apply if your brother sold the home at or below the fair market value. If he continued to live there rent-free, that would create another issue. That arrangement could be considered “uncompensated transfer” of housing services.

The state will also keep an eye out for gifts that could make an individual ineligible to receive benefits. The penalty duration — the number of months the individual is ineligible for Medicaid long-term care benefits — is calculated based on the amount of the uncompensated transfer.

So if he transferred the house to your sister for $100,000 less than the fair market value, with that amount being categorized as a gift, and the nursing-home care cost $10,000 a month, dividing the two figures would give a “penalty divisor,” or ineligibility period, of 10 months.

Medicaid is a federal program implemented at the state and local level, so the rules regarding eligibility, resources, and income vary from state to state, and are generally based on each state’s average monthly cost for private nursing-home care.

If your sister purchases the house, she and your brother’s other heirs would also lose their step-up in basis, a tax break that lets people inherit assets without paying hefty capital-gains tax. That could potentially cost those heirs thousands of dollars.

When selling a primary residence, married couples can exclude up to $500,000 in gains from capital-gains taxes, while single people or married couples filing separately can deduct $250,000. That would not apply to this home, if your sister purchased it from your brother.

If your brother’s house were worth $500,000 when he bought it and $1 million when he passed away, for instance, you and your sister would only have to pay taxes on the appreciation of the property based on its fair market value at the time of his death.

Your brother could also consider taking out a reverse mortgage. Those have their drawbacks but can be useful for someone who does not have a lot of cash. For example, if your brother’s health is declining, the upfront costs may outweigh the benefits.

Reverse mortgages are loans that allow people 62 or older to tap the equity in their home. They are originated by private lenders and insured by the Federal Housing Administration. The lender pays the borrower instead of the borrower making payments.

To be eligible for a reverse mortgage, a borrower must own their home outright or have a mortgage balance low enough to be paid off with the proceeds of the reverse mortgage. This option, however, can be a very expensive way to release the equity in your home.

If she did pay your brother’s expenses, they again would have to agree to this in writing before those expenses were incurred to avoid legal and estate issues. An elder-law attorney could help with these decisions. It’s time for a family meeting to discuss all these options.

Sometimes, such complications are unavoidable.

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