What are the tax implications of joint property ownership? This reader is on their mother’s home title and wants to know how their taxes will be affected.
Q: When my mother purchased her home 10 years ago she put me on the title with her. I do not live in the home. She did this in case I needed to sell the home and she was either unable to sell it or in case she died, I would be able to sell it.
Her intent was to have me split the profits from the sale with my siblings. She purchased the house for about $150,000. The home is currently valued at about $300,000. My thought was that when my mom needed additional care and needed to move into a facility, that the sale of her home would help with those expenses.
My mom is currently 85 and is still able to live in her home without assistance. At this point, if she is able to stay in her home until she passes, how does that affect me taxwise? My mom does not have a will and the home is her only asset other than her bank accounts, on which I am also listed as the joint owner.
A: Your mom’s home has doubled in price in 10 years and that’s a great thing. Since you and your mom jointly own the home, you could say that you own half of the home and your mom owns the other half. If you were to sell the home today, your mom would pay no tax on the profits on the sale of her half (because she lives there full-time) and you’d have to pay federal capital gains tax (and perhaps state tax) on the sale of your half. Frequently, when parents sell their home that is jointly owned with their kids, they will claim the entire profit for themselves and pay no federal income taxes.
What Are the Tax Implications of Joint Property Ownership?
The IRS allows homeowners that have lived in their home as a primary residence for two out of the last five years to exclude up to $250,000 of profits from any federal income taxes. That increases to $500,000 for married couples. And, that’s a huge tax break for homeowners. There are some other rules and requirements but the basic rules means most homeowners won’t pay any taxes if they have profits on the sale of their primary residence.
Another tax break that homeowners and real estate investors get is when they die. Your mom has a $150,000 gain on the home as the home’s value has doubled. When she dies, the IRS will allow her estate to step up the value of the home to the market value at or around the time of her death. That means that when you and your siblings inherit the home and sell it, you will be deemed to have received it at a value of $300,000 and sold it for the same amount. In this situation, you and your siblings would not owe federal income on the profit your mom would have made.
Here’s the rub. Your mom doesn’t own the home on her own. She owns the home with you. At the time of her death, her estate will get the stepped-up basis on her half of the home but when you and your siblings sell the home, you’ll have to pay federal income taxes on the gain on your half ownership of the home.
This is one reason why we don’t recommend joint property ownership between parents and kids, especially if a property has appreciated substantially in value. We prefer to see parents own their homes in their own name to enable the parent to get the full value of the home sale tax exclusion of $250,000 ($500,000 for married couples) when they sell or the stepped-up basis when they die.
A Living Trust as an Alternative to Joint Property Ownership
How else can parents pass down property and avoid probate? Try a living trust. When a property is in a living trust, the trust is the owner of the property and the parent controls the trust while he or she is alive. If the parent becomes incapacitated or dies, the trust is then controlled by the successor trustee designated by the parent.
In your situation, your mom’s home would be owned by the living trust, and your mom would be the trustee and beneficiary of the trust. In the document, she would name you as the successor trustee and would name you and your siblings as successor beneficiaries.
If she sold the home during her lifetime, she’d get the full benefit of the home sale exclusion. When she dies, her estate will get the benefit of the stepped-up basis on the current value of the property. It’s a win either way.
You should talk to an estate attorney and see if there is anything you should do at this point to lessen the tax burden you’ll eventually face.
You may also want to ask the estate attorney about the total value of your mother’s assets, and what needs to happen in case she can’t afford her care and needs to deplete her assets in order to qualify for Medicaid.
If your mother needs to go into assisted living, Medicaid would want to apply the value of her home toward her care. If you and she have owned the home together for at least 5 years, Medicaid may go after her one-half interest in the home, but may not be able to go after your one-half interest in the home. Your estate attorney should be able to educate you on what the Medicaid requirements might be, what assets your mother would be allowed to keep and what the spend-down requirements will be, should her health and circumstances require it.