Income Tax Considerations in Adding a Child's Name to Your Home

What to do with your home can be a concern for seniors who are planning for the future of their children or other beneficiaries. How you transfer ownership of your home can have some significant tax implications. One of these implications is the basis of the home for the beneficiary, which is the value that will be used for tax purposes in calculating the capital gain or loss if the home is later sold.

By adding the name of a child or other family member to the deed you are in effect making a gift during your lifetime. The basis of the home in the case of a gift would be the same basis as for you, which would generally be the original cost. Your child or other beneficiary would then be subject to capital gains tax if the home is later sold.

For example, if you purchased your home many years ago for $50,000 and the home now has a fair market value of $200,000 and you add a child's name to the deed, the child's basis would be $50,000. If the home is sold at its fair market value of $200,000, the child would pay capital gains tax on the difference of $150,000. At the current capital gains tax rate of 15%, the tax would be $22,500.

However, if you leave the home to a child in your will, the child acquires the home at a stepped-up basis equal to the fair market value of the home at the time of your death. In the same example, the basis of the home for the child would be $200,000. If the home were sold at that amount, there would be no gain and no capital gains tax.

Putting a child's name on the deed with the understanding that the child will sell the home after your death and distribute the proceeds among siblings or other beneficiaries would still be considered a gift to the child. So the basis for the child would be your basis, resulting in a potential capital gain. When the child distributes the proceeds, he or she may also be subject to gift tax if more than $13,000 is distributed to each person.

If you were to sell the home during your lifetime, you may qualify to exclude the gain on the sale if you owned and lived in the home. But if you add a child's name to the deed and the child does not live in the home, the exclusion would not apply when the child sells the home.

Sources:

Dorothy L Korszen, "Should You Add Your Child's Name to Your Home?" '" Farr Law Firm

Gift/Estate Taxes -- Adding Name on Deed '" Lawyers.com

Bay Area Estate Planning: Should You Add a Child's Name to the Deed? '" Janet Brewer

Should my parents add my name to the deed on their house? '" Life Tuner