When a parent adds their children to the title of their home – and later sells that home – the tax implications for the children are complicated.
Q: I read somewhere that what my mother did by putting her kids on the title to her home with her was wrong. How can the title be changed back to just the mother’s name?
Our mother added all of her adult kids to her property deed but now she is having to sell the house and move in with one of the kids. The house is paid for in full. We are worried about the tax implications when the house sells. My mom must keep all the money for her care.
A: There probably isn’t anything you need to do now. If you have a buyer for your mom’s house, your mom will sell the house to that buyer. On the documents with the settlement agent or title company, she will give her social security number and allocate the entire purchase price to her social security number.
You and your siblings will sign the documents to convey title to the new buyer but none of you will receive any money from the sale. All of the proceeds from the sale should go straight to your mom. Your mom will bear the tax consequences of the sale and you and your siblings should not be affected.
Now, we say all that thinking that you and your siblings didn’t have anything to do with paying for the home or paying for the monthly expenses for the home. We also assume that none of you took any deductions for expenses that had to do with the home, like mortgage interest. We also assume that none of you are looking for any cash to come from the sale of the home.
The situation would change dramatically if one of you wants money from the sale or took deductions on your federal income taxes for real estate taxes or claimed the home as an investment property.
But if the kids were only on title for estate planning purposes, so that the home would go to all of you when your mom died, you should avoid what’s known as a taxable event from selling a home that is not your primary residence and conveying title from all of your names to the new buyer.
Let’s go over why we think having parents add adult children to the title of their house is a bad idea. The primary reason is that you might squander a tax opportunity.
Under current IRS rules, your mom’s cost basis for the home might be quite low. If she were to die, her basis in the home would not transfer to you. Instead, the IRS would assess the home’s value as the fair market value of the home at or around the time of your mom’s death (which is called a “stepped-up” basis). So if your mom purchased the home years ago for $30,000 and now it’s worth $300,000, her cost basis (“basis” is the word the IRS uses) is $30,000 plus costs of purchase, costs of sale and the cost of any capital improvements made to the home while she lived there.
Let’s say that the profit on the home is about $250,000. If you and your siblings are on title to the property when your mom dies, the cost to you isn’t the $300,000 sales price you get when you sell the home, it will be the basis that your mom had, which could be a lot lower.
Here’s the bottom line: If you and your siblings are not on title when your mom dies, you will receive the stepped-up basis and consequently have no profit when you sell the home and no federal income taxes to pay. But if you are on title when she dies and then sell the home, you may have federal income taxes to pay.
If parents are trying to avoid probate, instead of putting kids on title, they’d be better off establishing a trust and then retitling the house in the name of the trust. The trust would allow for the easy transfer of title of the home after the death of a parent, or a parent can have a will that tells the executor of the will who gets the proceeds of the home, but you’d have to go to probate court to probate the will to get the home sold.
In some states, newer deed documents allow for the transfer of title of a home upon the death of a parent. These transfer on death instruments are becoming more popular. Title companies, on the other hand, have their reservations on how well they work and the practical issues of knowing exactly what has gone on with a property and the title to the property.
In any case, for your purposes, if the closing is soon, you, your siblings and your mom will sign the closing documents and your mom will report the sale of the home to the IRS but we doubt that you and your siblings will have any federal income tax issues. For more information, you should talk to an accountant, enrolled agent or relative that has knowledge about your situation and your federal income taxes.
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