If your parents own an appreciated home but do not have a mortgage, or do not benefit from the mortgage interest deduction, consider buying your parents' house and then rent it back to them at the going rate.
By doing this, your parents gain instant access to the equity they have built in their home (without moving), and you pick up some tax deductions.
Even if your parents still take a mortgage interest deduction, their tax bracket may be considerably lower than yours. If so, the deduction doesn't provide as much potential tax savings for them as it could for you and the family as a whole.
To avoid gift-tax complications, pay a fair price for the home. Support the price with a qualified, independent appraisal. Then enter a rental agreement at a fair rate. Courts have ruled that the fair market rental value can be reduced by 20% when renting to relatives and still qualify as a valid transaction.
Once you own your parents home, you are entitled to reap the tax benefits of owning rental property. This includes not only the mortgage interest and real estate tax deductions, but also operating expenses such as utilities, maintenance, insurance, repairs and supplies. In addition, you can claim depreciation deductions. These deductions offset the rental income received from your parents.
Eventually, when your parents can no longer live in the house, you can sell it, rent it to another family, or move into it. If you move into it and make it your principal residence for at least 2 years, you can sell it and shelter another $250,000 to $500,000 worth of capital gains, which is a true tax benefit!
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