Legal Question in Real Estate Law in California

Re: Buying my parents home.

Your question raises a great many issues, and I will try to give you some general pointers. However, my overall advice is that if you want to save taxes -- which may include inheritance, gift, capital gains and/or ordinary income taxes depending upon how the deal is done -- you and/or your parents should first spend a little money on professional tax and estate planning. Failure to plan, including failure to get professional advice, results in huge unnecessary overpayment of taxes for many families. The return on investment in professional planning is high.

OK, as to specifics. Your parents can give you their house or sell it for any figure you agree upon. The transaction is legal. However, it probably isn't smart. Most transactions between closely-related parties are "invisible" for IRS purposes. The IRS would probably treat a $1 sale the same as a gift, i.e. gift taxes would be due based on the fair value of the house. Also, a gift made within three years of death is includible in the decedent's estate for tax purposes.

Waiting rather that incurring the tax impacts immediately is usually the better practice, but there is a long list of other factors to consider.

Are there other prospective heirs?

What if one parent dies and the other remarries, possibly to someone with children of their own?

Will the total estate be within the inheritance tax exclusion, currently $675,000? Are there other assets that can be transferred under the annual gift exclusion to lighten the tax burden on the estate at death?

How would your parents' housing needs be met? By a life estate in "your" house? Do all of you understand the implications of this?

What is the possibility that a parent might need long-term care?

Do your parents have a will? A trust?

For most families, professional advice on all these issues pays off better than do-it-yourself plans like $1 house sales or ignoring the inevitability of death and taxes. While I do not believe "living trusts" are for everyone, nor do they do much for the tax burden, I do recommend estate tax planning and the earlier the more effective it can be.

Finally, I do not do this work so this is an impartial recommendation.