Everything You Need To Know About the Risks of Adding Another Person to your Deed.

Adding someone to the deed of a property may seem like a good idea but there are often unintended consequences. Before you proceed further, we ask that you consider the following:

Loss of Control

Adding someone’s name to your deed means that you are giving up control of the property. You give that person an ownership interest in your property. Think of it as equivalent to going into business with that person, the business being your property. You will not be able to sell the property, refinance your mortgage, or take out a new mortgage without this new owner’s permission. You will not be able to undo the transaction and remove your new co-owner from the deed without his or her consent. Your new co-owner can transfer his or her interest in the property to another individual without your consent.

Increased Tax Consequences

You might be motivated to add someone to your deed by a desire to avoid inheritance tax. Adding a child or other non-spouse to your deed may result in increased capital gains tax. The inheritance tax rate for transfers to a child is 4.5%. The capital gains tax rate is typically between 15-20%. When you give away your property, the tax basis (or the original cost) of the property for the donor (you) becomes the tax basis for the done (your child or other non-spouse). For example, suppose you bought the property years ago for $50,000 and it is now worth $200,000. If you give the property to your children and they sell the property, they will pay capital gains taxes on the difference between $50,000 and the selling price. You saved $9,000 in inheritance taxes but your child paid $27,000 in capital gains tax. Conversely, if your children inherit the house after your death, they’ll instead pay inheritance tax but no capital gains tax, an overall tax savings of $18,000. Calculate capital gains tax.

Transfer Tax

If you add a non-spouse or child to your deed, you’ll have to pay realty transfer tax. The tax is typically between 2-4% on the fair market value of the share of the property you are giving away. For example, if your property is worth $200,000 and you are adding a sibling to the deed resulting in two of you being the owners, you’ll pay transfer tax of 2% of one-half the value, or $2,000.

Creditors

Adding co-owners to the deed may expose that property to the claims of your co-owner’s creditors. For example, a judgment against your co-owner will be a lien on your property (even if the judgment is unrelated to the property). You will be required to pay that judgment to sell or mortgage your property. Your property could get drawn into a co-owner’s divorce, bankruptcy, collections lawsuits, tax problems and their own estates if they predecease you (you might have to pay inheritance tax on your own property!). We can do a judgment search for your intended co-owner for $99.

Mortgage

Is there a mortgage on the property? If yes, adding a co-owner may trigger the “due on sale” clause in your mortgage agreement, requiring you to pay off the mortgage in full. You’ll want to find out whether you must obtain your lender’s permission prior to transfer to avoid this.

Federal Gift Tax

Giving someone else an interest in your property — without being paid for it — constitutes a gift and could trigger the need to file a federal gift-tax return. Under current federal tax law, an individual can give another individual who is not a spouse no more than $15,000 in a calendar year without having to file a gift-tax return. We can file a gift tax return for $99.

Medicaid Coverage

Adding a co-owner to your title can affect your ability to qualify for Medicaid coverage for skilled nursing care. Gifts or transfers of real property made within five (5) years of applying for Medicaid can lead to a penalty and may disqualify you from receiving benefits.

If you’d like help with adding someone to your deed, you can get the process started by answering a few simple questions here. One of our real estate attorneys will be in touch within 8 business hours.