Should you put kids on title to house?
Here’s another reason why it’s a bad idea to have children listed on the title to your home.
Q: Friends of mine put their two children on the title of their house some time ago. The home has no mortgage. The father is now deceased and the mother is now 85 years old.
When the mother dies, the children will become owners of the house. However, I think that they will also inherit their parents’ basis in the house. There will be no step-up to current market value. Am I correct in advising the mother to get the kids off the title as soon as possible?
Should kids be on or off title to house?
A: Let’s get some of the facts and terminology correct. When you say that your friends put their children on the title to their home, do you mean that the parents no longer had an ownership interest in the home and only the kids were owners? Or, do you mean that the parents and the kids were all on the title to the home.
Many folks believe it’s good to add their children to the title of their home. Their thinking is they would own the home with the kids as joint tenants with rights of survivorship. In your example, if they did it this way, when the father died, the mother and her two kids would have been joint owners. Down the line, when the mother dies, the kids would become joint owners of the home.
Whoever benefits should be on title to house
But you have to answer this question: Who benefits from owning the house? Presumably, the father and mother took deductions for any interest payments made on any loans on the home. And, we assume they deducted the real estate taxes on their income tax returns. Some might say that the parents had all the benefits of ownership and the kids were merely on title for convenience purposes.
We’ve heard from readers who say the Internal Revenue Service (IRS) would allow the parents to be considered the sole owners of the home while they were alive. The kids would be considered the owners of the home once the parents passed. Maybe. We aren’t 100 percent comfortable with that statement.
Is it a Good Idea to Put Kids on Title to House?
Here’s why: Let’s say the parents purchased the home many years ago for $50,000. When dad died, the home was worth $400,000. When mom dies, the house is now worth $500,000. We’ll ignore any improvements that the parents made to the home or any of the costs of purchasing or selling the home. And, we’ll assume they were the only owners of the home.
When you sell a home, the IRS typically wants you to pay taxes on the profit from the sale. At a very basic level, if you buy it for $50,000 and sell it for $500,000, you’d realize a $450,000 profit. The IRS allows an individual to exclude up to $250,000 of profits (up to $500,000 for a couple filing jointly) realized from the sale of a home from federal taxes, but you must have lived in the home as your primary residence for two out of the last five years. In this scenario, both owners died without selling and receiving the benefit of the exclusion.
Now, when the father died, the mom would have inherited the father’s share of the home. The father purchased his share for $25,000, or one-half of the $50,000 purchase price. He transferred his share to his wife at a basis of $200,000, or one-half of the $400,000 the home was worth on the day he died. Let’s say that when the mother dies, the home’s value has grown to $500,000.
Here’s where it gets interesting. After the father died, the mother inherited the father’s share of the home, valued at $200,000. When the mom dies, her share would be worth $250,000, one-half of our assumed $500,000 value). If the mom were selling the home, her profit would be $50,000 on the father’s share of the home and $200,000 on her share of the home. But if she had sold the home before she died, she could exclude from tax the whole amount as she would be allowed to exclude up to $250,000 in taxes with the IRS.
Now we come to the kids. If they simply inherited the home at the time the mom dies, they inherit it at the $500,000 value. If they turn around and sell the home shortly after the mom dies, they have no profit. Why? They inherited a home valued at $500,000 and sold it for $500,000. That’s how the stepped-up basis works.
The IRS and tax practitioners will refer to the cost of a home as the basis and include the amount that was paid for a home plus costs of purchase, costs of sale and material improvements that were made to the home over the years. For a list of allowed improvements and other examples relating to all of these issues, download and read Publication 523 from the IRS’s website.
Generally, when parents put their children on the title of their home, the kids stand in the shoes of their parents. That means, the kids might not get the advantage of the stepped up basis because they are already on title. That’s why, when the last parent dies, the kids who are on title would have to pay a hefty tax to the IRS on the sale.
Tax Implications of Putting Kids on Title
But there is a possible out. If the kids move back into the home and use the home as their primary home for two years, they each get an exclusion of $250,000 on any taxes that could be owed on the sale.
Which takes us back to whether the kids are considered true owners of the home or simply on title for estate planning purposes. We assume that the kids have their own homes and likely won’t want to move back into their parents home for two years in order to get the tax exclusion.
What to do now? Have your friend’s kids consult with an estate attorney. The estate attorney may offer a few savvy suggestions, including using a revocable trust that names the kids as successor beneficiaries. But there could be others based on the total financial pictures.
©2024 by Ilyce Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency. A1621