Adding your children’s names to your house title and deed can affect your property taxes, income taxes and real estate taxes. Talk to an estate planner to help make your decision about gifting property.
Q: I currently own a home that is paid in full, with no mortgage. I want to add the name of my daughter to the house deed. Would you be able to tell me the pros and cons of this decision in terms of property taxes?
A: The question we get most often on this topic is how does adding a child’s name to the title of the property affect taxes. Usually, homeowners want to understand your issue when it comes to federal income taxes.
Just in case you were not aware of the larger issues involved when gifting a piece of property, here’s a brief summary of some of the tax issues involved. Giving a significant gift of more than $13,000 per year in 2012, which is the amount anyone can give anyone else without triggering a taxable event, affects a variety of tax issues.
Let’s start with property taxes. If your home is your primary residence, it should be considered an owner-occupied property. This designation is important as real estate taxes in many locations depend on whether your home is owner-occupied, a rental or investment property. Some states lower your property taxes significantly when you own the property as your primary residence. In some of these states, you pay a significant amount to your state government in state income taxes but get the benefit of lower real estate taxes.
In other states, if you live in the home as your primary residence, you get a standard reduction in your real estate taxes and, if you are a senior citizen, you might get an additional real estate tax break. Depending on the local tax rules where you live, you may find that adding your daughter to the title will not change anything as long as you continue to live there.
You need to know that some states use a property transfer to readjust the real estate tax valuation for the home. We’re not talking about a small change. If the taxing authority has your home’s real estate taxes pegged at the home’s value from 30 years ago, you can be sure they will try to do what they can to bring the home’s value in line to where they think it should be now, and your tax bill will reflect that change.
The short answer to your question is that the addition of your daughter’s name on title will either leave things the same for you in terms of real estate taxes or increase your future real estate tax bills. We don’t see a benefit in adding your daughter to the title to the home unless you don’t live in the home and you can get the benefit in your area of a reduced real estate tax bill by having her live in the home as her primary residence.
For federal income tax purposes, if you simply add your daughter’s name to the title, she receives the gift at your cost basis. For example, if you paid $100,000 for the property and it is now worth $500,000, and you give your daughter half of the house, her cost basis would be $50,000. When she goes to sell the property, she would be entitled to the $250,000 exemption is she is single and lives in the property as here primary residence. However, if she isn’t living in the property when it is sold, she might have significant capital gains taxes to pay.
What we’re trying to say is that simply adding a child’s name to a property can be problematic and costly in the end. Before you move forward with the transfer, talk to your local tax assessor’s office (treasurer’s office or clerk’s office that handles the real estate taxes for your home) and see if they can give you some guidance on the impact the transfer will have on your property’s real estate taxes. You can also talk to a real estate tax attorney or specialist in your area and get more information.
As you decide what to do, you should also talk to an estate planner and decide whether you are better off putting your home in a trust and have your daughter inherit the home when you die. You have quite a number of options and should probably walk through these options with an estate planner or estate attorney to see what fits your plan best.