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  • Writer's pictureSumrell Sugg

Don't Just Give It Away.



It sounds simple enough: make your adult children co-owners of your home during your life so that when you die, the house passes automatically without the need for probate.  What could go wrong?


You will lose autonomy over an important asset

The equity in your home is an asset you may one day need to utilize.  If you give a child all or a portion of your ownership in the home during your lifetime, you would then need their participation in any effort to sell the home or use it as collateral for a loan/equity line of credit in the future.  If you later wanted to downsize, move closer to another family member, or an unexpected illness results in large medical bills, you would no longer have full control over one of your largest assets. 


Your home will be exposed to your child’s adverse life experiences (debt/divorce/disability/death)

No one is immune from the adversities of life, and when an adult child experiences a financial hardship, domestic problem, or tragedy, parents are always emotionally impacted.  If that adult child is also a co-owner of your residence, your home is also exposed to the financial consequences of your child’s unexpected circumstance.

The child’s creditors can seek recovery from your home to satisfy your child’s debts.  If your child goes through a divorce, your home could become ensnared in the child’s domestic dispute.  If your child becomes disabled, their ownership in your home could impact the child’s ability to qualify for Medicaid or other government benefits.  And if your child predeceases you, their interest in your home could pass to unintended beneficiaries through the child’s estate. 


Your lender may demand immediate payment of your mortgage balance

If you still have a loan on your home, the terms of your mortgage likely provide that any transfer of the property will result in the entire outstanding balance of the loan being immediately due (regardless of your past stellar payment history or how many years you had remaining on the loan). 


Your children may incur taxes that could have been avoided

Described in basic terms, a capital gain occurs when a person sells an asset/investment that has appreciated in value over the period it was owned.  Capital gains taxes are imposed upon the profit made by the seller of an investment (i.e., the proceeds of the sale less the cost paid to acquire the asset).  For capital gains tax purposes, your cost basis in your home is the price you paid for it plus the cost of any improvements made to the home over the years.  


If you give your house to a child during your life, the child assumes your tax basis in the property.  However, if you retain ownership of the home until your death and it passes to the child through your estate, the child’s cost basis in the home will be “stepped-up” to the home’s “fair market value” on your date of death.  Your home’s fair market value is likely significantly higher than your out-of-pocket investment in it (especially if you’ve owned the home for a number of years). 


To illustrate the tax implications of a lifetime gift of the home versus inheriting the property at death, consider the two scenarios below based on the following general fact pattern:


Widow Jane dies in 2023, survived by Sarah, her only child and sole beneficiary of her estate.  Widow Jane purchased her home ten years ago for $200,000, and later spent $25,000 remodeling it.  In 2024, Sarah sells the home for $300,000. 


Lifetime Gift Scenario: Assume that one year prior to her death, Widow Jane transferred the home to Sarah as an outright gift.  Sarah’s cost basis in the home would be $225,000.  Upon the sale of the house, Sarah recognizes a capital gain of $75,000 ($300,000 - $225,000), and owes $11,250 in capital gains tax (assumes tax rate of 15% applicable to individuals with taxable income for the year between $47,000-$519,000).      

Transfer at Death Scenario: Assume Widow Jane retained ownership of the home throughout her life.  Since the home passed to Sarah as an asset of Widow Jane’s estate, Sarah’s cost basis in the home would be $300,000 as a result of the “step-up in basis” rule.  Upon the sale of the house, Sarah does not recognize a capital gain ($300,000 - $300,000 = $0) and owes nothing in capital gains tax. 


Conclusion

Even given the above risks, there are circumstances where it may be advisable to transfer an interest in your home to an adult child, typically as part of a comprehensive estate planning technique.  The takeaway is to understand there are downsides to consider before giving another person an ownership interest in your home.  Consult with a professional advisor first to ensure you safeguard one of your most important assets and leave it to others in the most tax efficient manner possible.

 

Article written by: Kyle Dickerson and published in Neighbor's Magazine | June 2024 issue


Sumrell Sugg, P.A. is a regional legal firm that provides clients with first-rate services in a cost-effective manner. Whether clients are individuals, corporations, or local governments and municipalities, our firm delivers on an undeviating promise of service. For more information, visit us at www.nclawyers.com.




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