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4 Ways to Tap Your House for Cash

Even in a down market, you can safely unlock your equity

3. Rent your home back

What if you've got an adult child who wants to live in the family home — but not quite yet? If he or she can afford it, the child could buy the home from you and then lease it back to you. That's called a sale-leaseback, and it can work in situations where children have substantial assets and are motivated to buy the property. "If the residence is a family heirloom, you could consider selling the home to a child or someone in the family," says Jerry Davis, a CPA and personal financial specialist in Gresham, Oregon. A sale-leaseback additionally could make sense if younger family members see the property as a good long-range investment.

To pull this off, you'd execute two documents — a sale document and a long-term lease. Financing arrangements can vary, Davis says: "It all depends on what Mom and Dad need. If they need a huge pile of cash, then the kids have to find outside financing to make it happen. Or it could be done with a down payment and installment payments going forward."

Let's say a 72-year-old couple is interested in selling the home they own free and clear to an adult son, and in continuing to live there. An independent, fair-market appraisal shows that the home has appreciated from its original purchase price of $50,000 to $450,000 today. The child purchases the home at today's appraised value, with a down payment of $90,000. 

The tax consequences of such an arrangement will vary depending on the particular circumstances. But in general, sale-leasebacks are complex, so talk to a good real estate attorney and accountant.

The parents then "loan" the rest to the child as a 30-year mortgage with monthly payments of $1,718, reflecting current-market interest rates of about 4 percent. The parents also would make monthly rent payments back to the child, reflecting fair-market rent values — in this case, $1,500 per month. That leaves the parents getting the $90,000 down payment, plus $218 monthly after the rent is paid. Or, if the child obtained bank financing for the amount above the down payment, the monthly payment would go to the bank; the parents would receive $450,000 at closing rather than a monthly payment from the child.

The tax consequences of such an arrangement will vary depending on the particular circumstances. But in general, sale-leasebacks are complex, so talk to a good real estate attorney and accountant. And beware: All manner of familial strife can get inflamed along the way.

"These arrangements may not always work to the retiree's advantage," says Christine Fahlund, a senior financial planner at T. Rowe Price, "especially if one or more of the children is ever sued or goes through a contentious divorce, resulting in a need for the children to sell the property to make ends meet."

Next: Sharing your home can cut costs. >>

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