Benefits of Multigenerational Housing

The benefits of multigenerational housing are there but you need to set it up carefully if you own the home with your parents or kids.

By Ilyce Glink and Samuel J. Tamkin

Q: Thank you for all your good advice through the years. I have a question: My husband, daughter and I are planning to combine households with my mother. She is a widow with some new health problems, and no longer wishes to live alone.

We looked for a house to accommodate all of us, but as you know, the housing market is crazy. So, we decided to renovate her home. She plans to retain ownership of the house, but we would like to pay for the renovations, which will be substantial. The renovations we are planning will equal the current value of the home.

What is the smartest way to make this contribution and avoid tax and estate confusion when she passes away or if we decide to sell as we will both have a significant amount of money invested in the property? Thank you for any insight you can provide.

Multigenerational households are growing fast

A: Multigenerational households have been a fast-growing segment during the Covid pandemic, either because extended families decided to create a “pod” that would help them stay safe from getting the disease or older family members got sick and needed care.

But even before Covid began, people saw the benefits of multigenerational housing. According to a Pew Research Center analysis, in 2016 roughly 20 percent of Americans , or about 64 million people, lived in multigenerational households, which is defined as having two adult-age generations living in the same residential unit. This is the highest rate since 1950, when 21 percent of the U.S. lived in multigenerational households and reap the benefits of multigenerational housing.

Pandemics and recessions have a way of increasing these numbers, and Pew notes that the numbers of multigenerational households grew rather sharply during the Great Recession of 2007-2009. When you lose your job, and maybe your house, you need to go somewhere, and living with family is often a more affordable option. But it’s a boon for older generations, who may need extra care, and their children, who often need an extra set of hands to watch young children.

So, the fact that you’re moving in together sounds like a great solution – but you raise some interesting questions about how to fund necessary renovations and how much you and your parent should benefit financially.

Sharing the costs with your parents

The best suggestion we can give you is to “buy” into the household with the cash you’re putting up for the renovation. If the property is worth $100,000 and you’re putting in $100,000, you should own the property equally, and share in the expenses equally going forward.

You should have a discussion about what should happen to the property after your mom’s death. Does she want you to own the property outright? Or does she want you and any other heirs (your siblings, hers, or someone else) to share it equally?

If she wants you to have it and there are other assets, maybe she will make sure her will includes a provision that leaves you the house and the other heirs assets of equal value to her share of the property. So if, after she dies, the house is valued at $400,000, her half would be worth $200,000. If you get that, will she have other assets worth $200,000 that can be left to a different heir to make things as equal as possible?

If your mother really wants to retain ownership of the property, then perhaps you can “loan” her the cash to make the necessary renovations. You can hire an attorney to draft up loan documents, which should include a minimum amount of interest under federal law to avoid gift tax issues. Make sure you all sign these documents and then record them in your local Recorder of Deeds office. If your mom doesn’t want to repay the loan during her lifetime (and you don’t care about the cash), then the loan documents can be structured in a way that allows her estate to repay the loan.

Good planning with an estate attorney

It’s worthwhile to talk to an estate attorney because after you make this investment, the home’s value may increase quite a bit. And if she decides to sell it, there could be substantial tax to pay if the profit exceeds the $250,000 exclusion. For example, if the house is worth $300,000 and you put in another $300,000, the property could be worth $1 million, or more. If she sells it, then she would pay tax on some of the profits.

Since you’ll also be living in the home, you should discuss who pays for what, including ongoing expenses, taxes, and insurance costs. But it’s also worth asking the estate attorney whether you should have ownership of your share of the home so you can enjoy some of the available tax benefits.

Make sure you and your mom understand the many ways this situation could play out (and there are plenty we didn’t cover here) before you move forward.