One strategy that some people use to bypass probate court is to add their children’s name to their house. As long as you own the house with joint tenants and the right of survivorship, this is a valid strategy; your house will pass to your joint tenant child probate free. But this isn’t a risk-free plan. Attorney Philip Ruce explains more in his video.
There are three things that can cause problems when you go joint tenant with your child.
- Homestead Protection
- Capital Gains Tax
- Gift Tax
Homestead Protection
When you own your home and you live there you have homestead protection. That means that your house is protected from a myriad of financial calamities. If you are sued, declare bankruptcy, or have trouble with creditors – your house is safe. They can’t take it from you because you live in it as a homestead and it is therefore covered by homestead protection.
If you add someone to your house who doesn’t live there – they do not have homestead protection. If they get sued, they could lose their non-homestead house – your house! Not to mention if they go through a divorce and their assets (your house) are divided.
As far as the courts are concerned – a house they aren’t living in may as well be a rental house and is subject to possession; you living there doesn’t matter. So it is very risky to add your child to your house from that perspective.
Capital Gains Tax
Your primary residence is exempt from Capital Gains Tax. If you sell the house for more than you paid for it, so long as you’ve lived in it for two of the past five years, you don’t have to pay taxes on the difference in value.
Inheritances are also exempt from Capital Gains Tax. If your child or beneficiary receives the house after your death they do not have to pay Capital Gains Tax on it when they receive it or when they sell it.
That is not the case for someone who receives the house as a lifetime gift – they don’t get the homestead tax break. And they will have to pay tax on it, even after your death.
Gift Tax
When you give someone joint interest in your house, you’re giving them a lifetime interest. The courts will consider it to be a gift. There is a federal gift tax that can be up to 40% of the value of the gift. A small amount is exempt from the gift tax, in 2020 it was $15,000 but it goes up with inflation every year.
If your house is valued at $200,000 and you give your child half of it, that’s considered to be a $100,000 gift, well over the exemption limit – they’ll have to pay tax on it. They can utilize the lifetime exemption to avoid paying taxes on the gift, but it does have to be reported, and the financials have to be tracked carefully.
These three things should stop you in your tracks if you are considering adding your child to your house. There are better solutions, and a good lawyer can help you find them.
