When you put your home in co-ownership with your children, your children become co-owners of the property with you. This can cause several problems.
First Problem: Putting your home in joint tenancy with your child or children is a taxable gift under IRS regulations. This means you must file a gift tax return for the year in which you made the transfer if the value of the interest transferred to each child is more than $17,000 (2023).
Second Problem: If your child has any lawsuits against him or her in the future, is going through a divorce, or has a tax lien filed against them, you may find out that you no longer own the house with your child, but with your child’s creditors. In many jurisdictions, creditors can foreclose on (force the sale of) your home to get at your child’s fractional share.
Third Problem: When you go to sell the home, you can use your primary residence capital gains exclusion ($250,000 for individuals and up to $500,000 for married couples) only on your fractional share of ownership. And upon sale, each of your children could end up having a long-term capital gains tax bill if the home is not their primary residence that could have been totally avoided if the house had been transferred to them upon death through your revocable trust. These types of transfers at death generally receive a step-up in cost basis upon the death of the original owner. Cost basis is the amount deducted from the sales price to compute whether there is a capital gains tax due when the property is sold.
Fourth Problem: If you add a child as a co-owner on your property or gift the entire property to them, you could trigger a reassessment of your property taxes. In 2021, Prop 19 went into effect in California. Prop 19 changed the rules for exclusion from reassessment on transfers of a primary residence to or from a parent to a child. Under the law prior to Prop 19, you could add a child to your home title and file a Parent/Child exclusion from reassessment to avoid any change to the property tax basis. Now under the new rules, the only way to do that is if your child lives in your primary residence and timely files a Parent/Child exclusion form and a Homeowner’s Exemption.If you, a client, friend, or family member needs help updating an existing estate plan or establishing one, please feel free to give us a call for help. You can reach our Intake Department at (760) 448-2220.