First, it's important to understand what a life estate means. The rights of the property get split into two parts, a life estate and remainder interest. The person holding the life estate (your neighbor) is known as the life tenant. The person holding the remainder interest (you) is known as the remainder person.
Your rights in the home as a remainder person are limited primarily to obtaining full ownership of the home when the life tenant dies or the life tenant gives up the life tenancy, and selling or mortgaging your remainder interest (if you can someone willing to buy or give you a mortgage).
The life tenant has all the rights of possession of the home until the he dies. That means the life tenant has the right to rent out the property, obtain a mortgage on his life estate interest (if he can find a lender to do it), determine who may be on the property, etc. The life tenant also has the burden of upkeep on the home, paying the property taxes on the home, and paying other costs of the home, like HOA fees, special assessments (like a sewer fee), etc.
In order to sell the property or get a mortgage on the property while the life tenant lives both you and life tenant would need to join in selling/mortgaging the property home because few buyers/lender will want to have an interest in the entire home, not just the remainder interest or life estate.
The entire value of the home is included in the life tenant's gross estate for federal estate tax. But the estate tax is not an issue for very many at the the moment because unified credit against gift and estate taxes only if the value of taxable gifts made during life and the value of the estate at death exceeds the unified credit. The unified credit for 2024 is $13,610,00. Extremely few Americans today have estates with that kind of value.
A life estate does give the remainder person up step in the home's income tax basis af the time the life tenant dies. That means for you the prospect of getting a bigger basis in the home should the home increase in value between the date of the creation of the life estate.
Life estates are primarly used today in estate planning as a way to avoid probate rather than tax planning. The life estate vanishes at the time of the life tenant's death and the remainder person (you) end up owning the house outright. As a result, the home completely escapes being included in the probate estate of the life estate.
You don't want to pay fair market value for the home just to obtain a remainder interest in the home. I won't go into the details but if the transaction occurred today the value of the life estate portion using IRS tables would be 13.21% of the sale price. For example, if the FMV of the home is $400,000 the reserved life estate would be worth $52,840, which means your purchase of the remainder interest should cost you only $347,160. In that transaction neither of you has any gift tax issues.
The bottom line for you is if you do the sale this way is that you save money on the purchase price and you get a step up in income tax basis in the home the day he dies. You also don't have any the expenses of upkeep, real estate taxes, etc until he dies. The main downsides are (1) that you have very little control over what he does on the property or who is allowed to be on the property while he still lives, (2) to get a mortgage on the property or sell it, both of you will need to join together for that, and (3) if you sell before he dies, you won't get 100% of the proceeds and your basis will be lower than if you just paid the FMV today and part company after the sale. Given his age, the life tenancy might not last long so the downsides might not be a big deal to you.
If you are interested in this idea, I strongly recommend you see both a real estate attorney and a tax professional to advise you regarding the exact costs and benefits and to aid you in getting the sale done correctly. If you screw up putting the life estate together you might not get the benefits you expect.