Many people think that adding their child to the deed of the family home is a wise estate planning strategy, particularly if one parent has passed away. The main reasons for this decision often include wanting to avoid inheritance taxes and probate, or preventing the family home from being sold to cover nursing home expenses. However, co-owning real estate with your children can create more problems than it solves.
Gifting Real Estate Comes with Tax Implications
From a financial planning standpoint, adding another person to the deed of your home is regarded as a completed gift. For instance, if you add your son’s name as a joint owner of a home valued at $250,000, this constitutes a gift of $125,000. While this amount is typically manageable since the current lifetime gift exclusion is $13.99 million, it still must be reported on a gift tax return because it exceeds the $19,000 single-year maximum for gifts that do not need to be reported.
Additionally, adding your child to the deed transfers the original cost basis of the property to the new owner. For example, if you purchased your home for $50,000 and it is now worth $250,000, then half of your cost basis transfers to the new joint owner. In this scenario, both you and your son would have a cost basis of $25,000, resulting in a $100,000 unrealized gain in the property.
If you sell the property while you’re still alive, your son will likely face a taxable gain of $100,000. This tax could have been avoided if the property had remained solely in your name. Only 19 states impose some form of a death tax. Therefore, if you live in a state without a death tax, adding your heir to the deed could unnecessarily subject them to capital gains tax. In Pennsylvania, the inheritance tax for a son or daughter is only 4.5%. In cases of substantial gains, the inheritance tax may end up being lower than the capital gains tax.
Legal Risks of Shared Home Ownership
A significant complication arises when you add someone to your deed, as they become a legal co-owner of the house. This means they must consent to the sale of the home, as well as to taking out a mortgage or a home equity line of credit. If you already have a mortgage on your property, you will need to obtain authorization from your mortgage lender before adding a second party to your deed. Some lenders may require you to refinance your mortgage to proceed with this change.
How Your Child’s Financial Problems Can Endanger Your Home
A home is often crucial to financial independence but exposing it to your child’s financial risks can be detrimental. Even if you agree to sell or borrow against your home’s equity, your child’s creditors might place a lien on it because of any judgments against him. Additionally, if your child faces tax problems, a tax lien could affect your property, and bankruptcy could result in the forced sale of your home, regardless of their financial responsibility.
If your child passes away before you, you might incur inheritance tax on the portion of your home gifted to them. Depending on the deed’s wording, their ownership interest could pass to their heirs, potentially leading to co-ownership with a son-in-law or daughter-in-law. Further complications could arise if your married child goes through a divorce, as their spouse may claim the house as a marital asset.
What About Your Other Children? Inheritance Inequities Explained
If you have more than one child, it’s important to consider the implications of adding one child to the property deed. Doing so could mean that you lose control over how your property is distributed after your death. Often, real estate is titled as joint tenancy with rights of survivorship. For example, if you have three children and add only one to the deed, the other two children would have no claim to the property. This situation could lead to disputes among your children regarding the fair distribution of assets.
Better Estate Planning Alternatives to a Deed Transfer
There are various options for transferring ownership of your home to a child that can help you avoid potential issues associated with a simple deed transfer. Some alternatives include living revocable trusts, irrevocable trusts, grantor trusts (which allow the owner to live in the house until death), family partnerships, and limited liability companies (LLCs). The best choice for you will depend on your specific goals.
When considering these options, it’s crucial to take into account tax implications and legal complications related to your unique situation, as well as the laws in the state where the property is located. Additionally, consider the other assets in your estate; financial assets like stocks and bonds, or those held in retirement accounts, have their own rules and regulations. It may be easier to achieve your overall objectives by focusing on assets other than your home.
To determine the best course of action, consult with a financial adviser or estate planner. They can help you clarify your objectives and provide guidance on the various options, along with the pros and cons of each.
Insights
- Adding a child to the deed of your house can lead to complications and may not fulfill your long-term goals.
- Even if a child manages money responsibly, they can still be sued, which could expose your home to creditors if they are a co-owner.
- Explore alternative methods of owning real estate with your children to find the solution that best fits your circumstances.
This article was originally published on October 6, 2020, and was updated for accuracy and relevance on the date above.
