Putting Kids On the Deed

Christian talk radio with Rob West

We all want to leave an inheritance to our kids, but tax laws sometimes make that complicated, especially if a home is involved. People often ask us "Should I put my child’s name on the deed to my home?" This is a smart question to ask, but the answer may surprise you. We’ll address that question today on MoneyWise. When people ask about putting their children on a home deed, most often it’s to pass a home along to their children within going through the probate process. But that solution may have unintended consequences. Putting the child’s name on the deed may solve the probate problem, but it creates new tax problems. It’s actually better for the parent to own the property outright upon death. LEAVING THE HOME IN YOUR NAME ALONE UNTIL DEATH Here’s what happens: The heir or heirs inherit the property at its current market value. So let’s say you bought a home in 1990 for, say, $100,000. If your child inherits the house and sells it immediately for $500,000, the profit since the original purchase would be $400,000. Under the current tax law, the child inherits the home at its value at the time of your death. So if the home is worth $500,000 and the child sells it for that amount, that’s also how the IRS views the value of the property. That means that in the eyes of the IRS, your child has no taxable profit on the sale of the home. That’s because of what’s called its stepped-up value (what it was worth when you passed the property on to your child). But what about estate taxes? Your child/children likely wouldn’t owe estate taxes on the home either. If the value of the estate at the time of death was less than $11.7 million, which is the current estate tax exemption, they won’t owe estate taxes. PUTTING YOUR CHILD’S NAME ON THE DEED Now, let’s look at the other scenario. You put your child’s name on the deed and the child becomes an equal partner in owning the home. Upon your death, your child would inherit only half the home’s value and would be entitled to only the stepped-up basis for that half. If your child then sells the home, they wouldn’t pay tax on the share inherited from you at the time of death. That’s good. The bad news is that the child would probably have to pay tax on the other half of the home’s value. That tax would be based on the value of the share the child received when you put their name on the deed and the child obtained ownership based on the value of the home when sold. Using the earlier example, you buy a home for $100,000, which is sold for $500,000 after your death. But in this scenario, you have put your child’s name on the deed as a co-owner. The child inherits your half of the property at the stepped-up basis of $500,000. So when your child sells that home, half of the $400,000 profit wouldn’t be taxable. BUT the other half would be taxable. BOTTOM LINE The bottom line is that in most cases it’s best to not put your child’s name on the deed before you die. If you’re still concerned about probate, a better alternative is to put the home in a living trust. LISTENER QUESTIONS On today’s program, Rob also answers listener questions: ●Can you claim a tax deduction for educational expenses you’re covering for your grandchildren? ●If you draw Social Security before your full retirement age, is there a limit on how much you can earn through employment. ●How do Social Security benefits change at age 65 for a person already receiving Social Security disability benefits? ●How should a retiree drawing Social Security handle a six-figure inheritance? ●What is the wisest way to invest proceeds from a home sale? ●What are the best low-risk investment options for a widow following the sale of a rental property? RESOURCES MENTIONED DURING THIS PROGRAM: ●SoundMindInvesting.org Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected] Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. Like and Follow us on Facebook at MoneyWise Media for videos and the very latest discussion! Remember that it’s your prayerful and financial support that keeps MoneyWise on the air. Help us continue this outreach by clicking the Donate tab on our website or in our app.