Welcome! Thank you for your question.
I am sorry to hear about your in laws situation. Those are very good tax considerations that you are noting. However, the IRS and PA department of revenue
will not impute income provided that you do this strictly as a gift and do not try to set up a loan or payback provision. Also, the sale proceeds would be excluded from capital gain for them so long as they have lived there for 2 of the last 5 years and the gain from the sale is less than $500,000 for the couple.
As for Gift tax, it is also likely not an issue. The rent free living in the home would technically be considered a gift to your in laws. However, as you noted, the annual federal gift tax exclusion is $14,000 per person. Any imputed gift would be based on rent and would be well below $28,000 for both of your in laws. Further, even if you should be to reporting a gift over $28,000, you have a 5.125 million dollar federal gift tax exclusion that would prevent you from having to pay gift tax. Finally, the state of PA does not have a gift tax.
I cannot provide you with legal advise. I have provided you with information about the law related to your question. My answer, and any information that you find online, should not take the place of having a consultation with a lawyer in your area to advise you regarding your specific issues.
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