What is a reverse parent purchase

A reverse parent purchase can be described as a classic parent purchase in reverse.

In other words, instead of your parents buying a property to rent to you, you buy a property to rent to your parents.

And just like with a classic parent purchase, there are a number of rules you need to be aware of.

A reverse parent purchase differs from a classic parent purchase in the following ways:

• You have the option to buy your parents' current home, which can then be rented to them.
• You have the option to buy a new property so your parents can sell their current one.
• You have the option to move out of your own home so your parents can rent it. You then find a new home for yourself.

How does a reverse parent purchase work?

There are different ways to carry out a reverse parent purchase. Below, you can see three examples of how a reverse parent purchase can play out and which rules apply.

Example 1: Your parents sell their home to you

Let's say your parents have retired and therefore need more financial flexibility. In such a situation, it would be advantageous for them to sell their current home to you so that you can act as the landlord.

This means your parents become tenants and can apply for housing benefits via borger.dk, which for many old-age pensioners is advantageous. As old-age pensioners, your parents can receive a tax-free housing subsidy of up to DKK 4,563 per month (2024).

How much your parents can receive in housing benefits depends on their income, assets, the size of the home, and whether they are disability or old-age pensioners. You can read more about this at borger.dk (external link).

Such subsidy options would not be the same if your parents were the owners. In that case, housing benefits would function as a loan that would have to be repaid with interest if they moved or sold their home.

Secondly, they are also not required to pay property value tax.
The advantage for you in this situation is that your parents have the option to sell their home at 20% below the official property valuation, while still being able to live there as tenants instead of owners.

Example 2: Your parents rent your property

Another scenario could be that your parents have retired and therefore need less space and a smaller home.

In such a situation, they would have the option of renting your property if you are willing to buy a new home and move into it.

Example 3: You buy a new home for your parents

Your parents are in a situation where they want to sell their home to gain more financial flexibility. You therefore buy a home for your parents, which you rent out to them. This is obviously an advantage for your parents, but it can also be an advantage for you, because this type of reverse parent purchase is often a good investment opportunity.

However, it is a good idea to familiarize yourself with the housing market before making such a purchase, so that you avoid losing money on the investment in the long run.

What are the benefits of a reverse parent purchase?

There are many benefits to be gained from a reverse parent purchase, and as the examples show, this applies to both you and your parents.  

Even so, it can be difficult for many to understand exactly what the benefits and potential risks are. We have therefore created a detailed overview of the advantages and associated risks of a reverse parent purchase.

But remember, the primary benefit of a reverse parent purchase will always be that your parents are guaranteed a good place to live at a reasonable rent.

Benefits of a reverse parent purchase for you as the landlord

There are several things you can benefit from with a reverse parent purchase.

If you choose to buy a home for your parents, there are generally good opportunities to find a suitable property at a reasonable price as soon as you look outside Aarhus or Copenhagen. This means that you can finance a rental property for your parents relatively cheaply.

If, on the other hand, your parents plan to transfer their home to you, you can take advantage of certain tax benefits. For example, there is the possibility of a tax-free transfer of assets from your parents to you.

Another tax advantage in this context is that the tax authorities are generally required to accept a sale price that is 20% lower than the official property valuation.

This means that if your parents' home is valued at 2 million DKK, you could buy it for 1.6 million DKK. And let's say the actual market value of the home is 2.5 million DKK, then your parents would be transferring the total value—that is, 900,000 DKK—to you tax-free, thereby saving on inheritance tax.

Choose the right loan

If you are considering either buying a home for your parents or buying your parents' home, you must be aware of the rules for loans, both with mortgage credit institutions and banks.

For example, if you have a debt that is more than 4-5 times the total annual household income, it can be difficult to get a loan from a mortgage credit institution. If you wish to finance your home purchase by borrowing money from a bank, it is important to be aware that the interest rate is significantly higher than with a mortgage credit loan.

You may therefore risk entering into a transaction that is not in your own best interest.

Risks associated with reverse parent-child property purchases

Like many other things, a reverse parent-child purchase also comes with certain risks. You should be aware of these risks before you embark on buying property for or from your parents.

First and foremost, you could end up losing a significant amount of money on a reverse parent-child purchase. If interest rates or unemployment rise, for example, housing market prices will fall. If housing prices drop, you will lose money on your property purchase if you sell during that period.

One way to avoid this uncertainty is to choose a fixed-rate loan. With a fixed-rate loan, the outstanding debt on the property will decrease if interest rate levels rise.

Of course, you may also encounter a situation where the Danish Parliament tightens the rules for housing benefits for pensioners. If that happens, the shift from owner to tenant might not be as advantageous for old-age pensioners.

Tax and reverse parent-child purchases

Regardless of whether it is your parents' own house, a new apartment, or something else entirely that you are buying for your parents, there are a number of tax-related matters you must take into account.

When you rent out a house or an apartment to your parents, you will be considered a business owner for tax purposes. This is because renting out property is a commercial activity, as you are receiving rental income from your tenant.

Not everyone is aware of this before they embark on a reverse parent-child purchase.

Nevertheless, it is good to be familiar with the tax rules associated with running a business.

We will cover these rules in the following sections.

Accounting

As a reverse parent-child purchaser and now a self-employed business owner, it is first and foremost important that you keep accounts of the income and expenses incurred during the financial year, because you must pay tax on your business's profit.

• Income in addition to rent could, for example, include electricity, water, and heating.
• Your expenses will typically come from property taxes, interest, property maintenance, and insurance.

When the Danish Tax Agency (Skattestyrelsen) opens your tax return form in March, you must finalize your accounts for the property rental and report the figures to the tax authorities.

For this reporting, you can choose to use one of the following three tax schemes:

1. The Personal Tax Act
2. The Business Tax Scheme
3. The Capital Return Scheme

All of these have various pros and cons, which you can read more about in this blog post.

Rent

As a landlord in a reverse parental purchase, you are in principle free to set the rent as you see fit.

However, there is a caveat. If you set the rent too low, you and your parents risk attracting the attention of the tax authorities. There is a market rent that the tax authorities use to assess whether you have set the rent at a price that aligns with the market and does not distort competition.

You can read more about market rent here.

If you set the rent below the market rate, the tax authorities will tax the difference between the rent you have set and the rent they believe you should be charging.

This naturally has consequences for you, as you will have to pay tax on money you have not received, but it can also have consequences for your parents.

The tax authorities consider the difference between the market rent and the low rent to be a "gift," and if it exceeds DKK 74,100 per year, your parents will be subject to a 15% tax on the amount (2024 rate).

Therefore, we always recommend that the rent you set follows the market rate.

Deductible expenses

It can be a jungle to navigate what you can deduct for tax purposes as a reverse parental purchaser. A good rule of thumb, however, is that you get a deduction for expenses that enable you to operate and maintain your business.

In this regard, the tax authorities always distinguish between maintenance and improvements.

Maintenance applies to, for example, painting work.

‍Improvements such as a new kitchen or bathroom are generally not tax-deductible, even though they increase the value of the property.

However, as with so many other things, there is no rule without an exception, and you can therefore claim deductions for improvements when selling your property. Improvements are added to the purchase price of your home, which means that the difference between the purchase and sale price becomes smaller.

At Reportability, we help you get all the deductions you are entitled to. Below is a list showing some of these deductions

1. Deductions for interest and contributions.

2. Maintenance - including painting, repair of wear and tear, and general items that maintain the property's value.

3. Electricity, water, and heating.

4. Common expenses - this can include expenses for insurance, sewage charges, etc.

You can read about deductions for improvements and maintenance in our blog post about tax on rental income.

Do you need help getting your taxes in order for your reverse parental purchase?

As the blog post also illustrates, there are many rules and requirements you must be aware of as a landlord in a reverse parental purchase.
At Reportability, we have helped many reverse parental purchase landlords report their taxes.

Even though it may seem like an overwhelming process, fear not!

By using our tool, you simply need to follow 5 easy steps before you have a tax return ready to use on your tax disclosure form. We ensure that all requirements and rules are met and that you receive the deductions you are entitled to.