Why You Should Think Twice Before Adding Your Kids to Your House Deed

Ah, the joys of homeownership! You've worked hard, paid off that mortgage, and now you're thinking, "Hey, why not add my kids to the deed, making sure they inherit it without hassle?"  You may have even heard this avoids a lengthy court, probate process. But slow down there, eager beaver! Before you jump into this seemingly generous gesture, let's talk about why it might not be the smartest move for your family's financial future.

The Siren Song of Good Intentions

We get it. You love your kids, and you want to make sure they're taken care of when you're gone. Adding them to your house deed seems like a straightforward way to pass on your property and avoid probate. But hold on! - because this well-meaning move could end up costing your children a pretty penny in the long run.

The Capital Gain Surprise

As you already know, after you purchase your home, (hopefully) it will start increasing in value.  Likely, the longer you’ve owned it, the more value it’s gained.  What you may not have known is that if you now sell that home during your lifetime, the financial gain from the sale must be reported to the IRS and a capital gain tax may be levied.  The capital gain can be as high as 37 percent!   Luckily, there is a large exemption amount if you lived in your home and used it as your primary residence for two of the five years prior to selling it:  the first $250,000 in profit (or $500,000 if you’re married) is exempt from capital gains taxes.  Working with a good accountant familiar with this process can help by deducting qualifying expenses such as repairs, renovations, investment losses, legal fees, closing costs, etc.  But if you have owned the house a long time, and it has significantly appreciated, there may be no way to avoid a hefty capital gain tax.

The Step-Up Basis: Your Secret Weapon

Here's where things get interesting. When you die (sorry to be a downer, but it's a fact of life), your heirs get a magical tax benefit called the "step-up in basis" on property they inherit. It's like the IRS waves a wand and says, "Poof! The value (or basis) of this house is now reset (or “steps up”) to its current market value (from the original purchase price)." This means your kids can potentially sell the house and pay little to no capital gains tax.

But wait, there's a catch! This nifty little trick only works if your kids inherit the property. If you add them to the deed while you're alive, you're essentially giving them your original cost basis (as if they purchased it at the same time with you), and they'll miss out on this tax-saving bonanza.

A Tale of Two Scenarios

Let's break it down with a fun little story:

Scenario 1: The Inheritance Highway

You bought your house for $100,000 back in the day. Fast forward to your demise (again, sorry), and now it's worth $500,000. Your kids inherit the house and decide to sell it for $500,000. Thanks to the step-up basis, their cost basis is $500,000, and they owe exactly zero dollars in capital gains tax. Cha-ching!

Scenario 2: The "Oops, I Added My Kids" Expressway

Same house, same values. But you added your kids to the deed recently. After you pass, they sell the house for $500,000, but their cost basis is your original $100,000. If the house qualifies for the exemption, they can deduct $250,000 from that $400,000 proceeds, but they are still on the hook for capital gains tax on $150,000. Ouch!

The Bottom Line: Patience is a Virtue (and a Tax Saver)

So, what's the moral of our little tax tale? Sometimes, the best way to help your kids is to do... absolutely nothing. By keeping your house in your name and letting your children inherit it, you're setting them up for a potentially significant tax break.  Or even better, create an estate plan to make sure your intended loves ones receive the home and the step-up basis.

But Wait, There's More!

Adding your kids to your deed isn't just a potential tax headache. It can also:

• Expose your property to your children's creditors

• Complicate things if you need to sell or refinance

• Create family drama if one child wants to sell and the others don't

The Takeaway

Before you rush to add your kids to your house deed, take a deep breath and consider the long-term consequences. Sometimes, the most loving thing you can do for your children is to keep your assets in your own name and let them reap the benefits of a step-up basis when the time comes.

Remember, estate planning isn't just about avoiding probate – it's about maximizing the value of what you leave behind. So, if you truly want to give your children the gift of your hard-earned assets, consult with an estate planning attorney to find the best scenario for you and your family.  Working with professionals will help you maximize those tax benefits and that sweet step-up basis in the future. Your wallet-savvy offspring will thank you!

About the Author

Leslie has been practicing law since 2009 and is the host of the estate planning podcast 'Legacy Purse'. She has a long history of representing family members struggling to inherit property and/or wealth from deceased family members through the Probate Courts. Knowing how time-consuming and expensive the probate process is, Leslie takes great pride in helping her clients learn how to plan and protect their families during their lives so they can avoid the probate court process and save their loved ones that additional grief (and expense).