Multi-Generational Family Tax Benefits

The economic recession that began in 2008 has made it more common for families to live in multi-generational households. Once a living situation that was considered to be old-fashioned, this arrangement offers financial benefits for people who are still recovering from the monetary strain caused by job loss. At a basic level, living in these households is beneficial because it reduces housing costs for each adult in the household. Many people are surprised to learn that there are also family tax benefits related to this living situation.

Family Tax Benefits for Multi-Generational Homes

Moving into one of these homes can give families access to tax breaks associated with paying a mortgage. Mortgage interest can be deducted, but all adults in the household should be careful about claiming this deduction on their taxes. If one person is paying the mortgage, that individual will claim the deduction. In most cases, the individual who is taking the deduction must have their name on the title as the legal owner.

That owner has the option to distribute the savings from a tax deduction if they choose to do so. Additionally, if the owner pays more than half the cost of the home's upkeep and supports qualifying relatives, they may be able to file as a Head of Household, which could reduce the tax burden.

Tax planning may be required to ensure that family tax benefits are fully utilized when living in a multi-generational home. If everyone in the home is employed, the person or couple in the highest income tax bracket stands to save the most when deducting mortgage interest. Families may discuss whether the savings will be retained by the person who claimed the deduction or distributed among all family members.

Joint Ownership Issues

The family tax credits listed above can be helpful for the owner of a property, but it is important to realize that joint ownership is a different story. If an elderly parent would like to purchase a home jointly with an adult child, both parties may want to ensure that their names are on the title. However, this situation could pose problems if one of the owners runs into financial problems.

For example, imagine that the older individual ends up needing to move to assisted living and requires Medicaid assistance to do so. If the elderly owner of the home dies, the government may place a lien on the property in order to recover the costs of medical care. The same situation may occur if the adult child fails to make tax payments. The IRS may choose to place a lien on the home, and the joint owner of the property may end up facing financial difficulties due to a situation that they did not cause.

The risks of joint ownership may make it more beneficial for families to live in a home owned by a single person or a couple.

Additional Tax Benefits

In certain cases, the owner of a multi-generational home can claim qualifying dependents to help lower taxes through assistance like the Child and Dependent Care Credit. The IRS defines qualifying defendants as children or relatives who rely on the owner for financial support. The IRS has in-depth information about qualifying requirements and general dependent rules here.

Family Tax Disadvantages

While there are tax benefits associated with multi-generational living arrangements, there are also disadvantages that everyone in the household will have to work through. Legal implications should be addressed before a family moves in together. One way to get started on sorting through the legal issues surrounding such a move is to sit down and discuss the following questions:

• How long will the living arrangement last? If there is a specific reason for the move, any changes in the living situation may hinge on whether or not the underlying reason changes. For example, adult children who move in with their parents after losing a job may establish that they will move out six months after finding another employment opportunity. If older adults are living in the household, they may inform the family that they would like to move out when they feel that living in a retirement community is more suited to their needs.
• How will rent or mortgage payments be structured? If the owner of the house is helping out family members by letting them live there, it's possible that their family members will not be asked to pay rent. However, families who plan to live together in the long term will need to determine how to split up housing costs fairly. Cost-sharing for utilities doesn’t provide specific tax advantages.

Another financial implication that should be considered is whether or not rent payments to the owner of the house will need to be counted as income when IRS tax returns are filed. Some people simply ask their family members to cover the added utility costs that they incur due to the addition of another person in the home, but those who charge rent above this amount are responsible for treating it as passive income, which is taxed as ordinary income.

Living in a multi-generational home can be a challenge, but it also offers financial benefits including tax advantages. The best way to fully take advantage of the family tax credits is to use the E-file website.

Frequently Asked Questions

Can I claim a deduction or credit if I'm caring for an elderly parent or relative who lives with me?
In some cases, yes. It's possible to claim such an individual as a dependent if they meet IRS income limits and tests. You could be eligible for Credit for Other Dependents. Also, if you pay their medical expenses, you can deduct them as long as you itemize.

What is the financial support test for claiming relatives who live with me as dependents?
You must offer proof that you provide more than half of their financial support for the tax year. This includes the housing, groceries, clothing, utilities, and transportation costs. However, the dependents' Social Security benefits or pensions aren't counted as support from you.