I get asked often why you shouldn’t just add your child to your deed on a house or vacation home. Doing so is an awful idea and should never be done. And, listen, if you can get a lawyer to say you should never do something, it’s probably a really bad idea. Here’s why:
When you add a child to your deed, you are gifting a 50% share of the house to that child. That gift is subject to the gift tax, and you would be required to file a Form 709 with the IRS to declare that gift. If you don’t, you can be subject to fines and even criminal prosecution.
If your child is on your deed and declares bankruptcy, at least their share of your house (half) is subject to being taken in that bankruptcy. Or if he has debt issues, you might end up with a lien on your house. Or if he gets a divorce, his spouse can try to claim half of your child’s share. It’s a sure-fire way to end up owning the house with someone you never intended to own it with, like a bank, or your ex-daughter-in-law. And, yes, that person can move in with you if he or she wants.
Your child has to consent to your sale of the house. If he does, he gets half the proceeds of such a sale. If he wants to gift that money back to you, he needs to file a gift tax return. Meanwhile, your child is welcome to sell his half to anyone without your consent.
If you apply for Medicaid within five years of adding your child, it will delay your Medicaid eligibility.
Loss of Step-Up in Basis
Let’s imagine your house is worth $500,000, but you paid $400,000 for it. If you sell your house the day before you die, you might owe capital gains on the difference: $100,000. But if your child inherits it from you and sells it the day after you die, she gets a “step-up” in the basis of the house and owes $0 in capital gains. When you put her on the deed, she will only get a partial step-up, and thus will owe some capital gains when she goes to sell. Depending on how much your house has appreciated, that tax bill could be tens of thousands of dollars.
If you add them to real estate that is not your primary residence (vacation or investment property) with a mortgage, the mortgage company may declare that a “sale” and demand immediate payment in full of the mortgage. As a practical matter, they may well allow you to do a refinance (paying the new closing costs and possibly a new interest rate), but they don’t have to do that. If you can’t pay the mortgage and they don’t want to refinance, they can declare you in default and sell the property.
So, if you’re cool getting hit with gigantic bills or owning your house with a stranger who decides to move in with you, you should go ahead and add your child to your deed. If you’d prefer to learn some smart strategies for protecting yourself, your assets, and your loved ones, contact Learned Lawyer today!