The Risks of Adding Your Child to Your Home’s Deed

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houseMany people think it is a good idea to put their children’s name on the deed to their home. Especially if one of the parents is deceased. Usually the motivation is to avoid inheritance tax, probate, or to avoid having the family home sold to pay for nursing home expenses. Complexities arise when parents co-own real estate investments with their children that may actually create more problems than it solves.

Adding another person to the deed of your home is a completed gift. For example, a home valued at $250,000 that you add your son’s name as joint owner completes a $125,000 gift. This is probably not a problem now that the lifetime gift exclusion is $5.45 million. However, it should be reported on a gift tax return since the amount exceeds $14,000 – the maximum amount of a single year gift that doesn’t need to be reported.

Gifts transfer the original cost to the new owner. If you paid $50,000 for your home that is now worth $250,000, half of your cost transfers to the new joint owner. Your son has a $100,000 unrealized gain in the property. The gain will most likely become taxable when he sells the home. Only 19 states have a death tax of some kind. Anyone living in a state with no death tax would be potentially subjecting an heir to capital gains tax unnecessarily by adding them to the deed. In Pennsylvania, inheritance tax to a son or daughter is only 4 ½%. The inheritance tax could be less than the capital gains tax if there is a large gain.

Another troubling complication arises when you add a person to your deed – they become a legal co-owner of the house. This means they would have to consent to the sale of the home or to take out a mortgage or home equity line, etc. If you already have a mortgage on your property, you will need to obtain authorization from your mortgage lender to add a second party to your deed. Some lenders may require that you refinance your property.

Even if you are in agreement about selling or borrowing against the equity in the house, your son’s creditors could place a lien on the house based upon judgments they may have against your son. A tax lien could be filed against your house should your child run into tax problems. If your child declares bankruptcy, your house may have to be sold. You should consider this possibility even if your child handles their money responsibly. They could be sued as a result of a motor vehicle accident and their interest in your house becomes attached.

There is also the possibility your child would die before you. You could end up paying inheritance tax on the portion of your own home gifted to your child. Depending on the way the deed is worded, your child’s ownership interest in the house could pass to their heirs. You could end up owning the house with your son-in-law or daughter-in-law. Your married adult child creates another potential problem. Should they become party to a divorce action, their spouse could claim the house is subject to equitable distribution as a marital asset.

Finally, you need to consider the implications this causes if you have more than one child. Placing a child on the property deed could mean that you lose any say in how your property is divided in the event of your death. Many times real estate is titled as joint tenancy with rights of survivorship. If you have three children and only add one child to the deed, your other two children have no right to the property. This could create disputes among them about a fair distribution of assets among the children.

There are other options for transferring ownership to a child that can avoid these problems. Living revocable trusts, irrevocable trusts, grantor trusts with the right to live in the house until death, family partnership, or LLC, etc. The best option will depend on what you want to accomplish. Tax implications and legal complications based on your particular circumstances will need to be considered. The particular laws of the state where the home is located will have its own unique twist on which direction to go. A final consideration will be the makeup of other assets in your estate. Financial assets such as stocks and bonds, or assets held in retirement accounts have their own set of rules. It may be easier to reach your goal using an asset other than your home.

You should meet with a financial planner or estate planner to determine what you want to accomplish. They can advise you on your options and the pros and cons of each.

Rick’s Insights

  • Adding a child to the deed of your house can create many complications and may not achieve your goals in the long run.
  • Even a child who handles money responsibly can be sued which would expose your home to creditors if they are a co-owner.
  • Other methods of owning real estate with your children should be explored to determine which works best in your unique circumstances.

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