You want your adult child to inherit the family home when you die – and you don’t want it to be a difficult process. Adding your child’s name to your home’s deed may seem like an easy way to make sure they inherit and avoid probate.
However, transferring ownership interest in your home while you’re still alive can leave you with an unexpected tax bill and more.
Your property tax may go up
Under California’s Proposition 19, transferring an ownership interest in your home to your child may trigger a property tax reassessment. While certain parent-child transfers qualify for an exclusion, the rules are considerably more restrictive than they once were.
A reassessment could substantially increase the property’s annual tax bill, particularly if you’ve owned your home for decades and its assessed value is significantly lower than its current market value.
The capital gains taxes might be huge
When you give your child an ownership interest during your lifetime, they generally receive your existing tax basis in that interest. If they eventually sell the property, they could owe capital gains taxes on appreciation that occurred long before they became an owner.
By contrast, property inherited after your death generally receives a new tax basis reflecting its fair market value at that time. This adjustment can substantially reduce the capital gains taxes your child might owe if they later sell the home.
There could be gift taxes
Adding your child to your deed may also constitute a taxable gift for federal gift tax purposes. Depending on the value of the interest transferred, you may need to file a federal gift tax return.
Is there a better way to go about this?
If your main goal is to make sure your child gets your home without the hassle of probate, adding them to the deed may be the wrong move – and may cause more problems than it cures. A living trust, in comparison, could accomplish your goal without transferring ownership immediately.
Before changing your home’s deed, it may be wiser to talk to an experienced estate planning attorney. You can describe your goals and they can help you meet them.