The reason for considering the transfer of a full or partial ownership in your home to children makes a difference in how you should proceed, says nj.com’s recent article entitled “What taxes are owed if I add my children to my deed?”
If the objective is to avoid probate when you pass away, adding children as joint tenants with rights of survivorship will accomplish this. However, there may also be some drawbacks that should be considered.
If the home has unrealized capital gains when you die, only your ownership share receives a step-up in basis. With a step-up in basis, the cost of the home is increased to its fair market value on the date of death. This eliminates any capital gains that accrued from the purchase date.
There’s the home-sale tax exclusion. If you sell the home during your lifetime, you’re eligible to exclude up to $500,000 of capital gains if you’re married, or $250,000 for taxpayers filing single, if the home was your primary residence for two of the last five years. However, if you add your children as owners, and they own other primary residences, they won’t be eligible for this tax exclusion when they sell your home.
In addition, your co-owner(s) could file for bankruptcy or become subject to a creditor or divorce claim. Depending on state law, a creditor may be able to attach a lien on the co-owner’s share of the property.
Finally, if you transfer your entire interest, the new owners will be given total control over the home, allowing them to sell, rent, or use the home as collateral against which to borrow money. If you transfer a partial interest, you may need the co-owner’s consent to take certain actions, like refinancing the mortgage.
If you decide to transfer ownership, talk to an experienced estate planning attorney to prepare the legal documents and to discuss your goals and the implications of the transfer. The attorney would draft the new deed and record the deed with the county office where the property resides.
A gift tax return, Form 709, should be filed, but there shouldn’t be any federal gift tax on the transfer, unless the cumulative lifetime gifts exceed the threshold of $11.7 million or $23.4 million for a married couple.
Suggested Key Terms: Gift Tax, Estate Planning Attorney, Probate Attorney, Gift Tax Exclusion, Step Up Basis