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Adding a party to a real estate deed, what are the tax implications? SMS 11-17-2006
Posted by SMS on November 17, 2006, 1:19 am
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 I have a relative that wants to add my wife to the deed of
her house, so that when she dies my wife will get her house.

From what I have read, this is a bad way to transfer real
property.

First, it appears as if it would trigger an immediate
reassessment under Prop 13 (this is in California, and what
I read is that only parties with a security interest in the
property, or a spouse or a child can be added to the deed
without a reassessment).

Second, it may require a new mortgage, since the mortgage
company has the right to call the loan if parties are added
or removed from the mortgage. Since the current mortgage is
at 4%, there is a big incentive for the bank to call the
loan, and a new mortgage would be at about 6%.

What isn't clear is if the addition of a party (not a spouse
or child) to the deed be considered a gift of half the value
of the property, and if it would trigger a gift tax. It is
essentially a gift of half the equity in the property.

I remember that my wife and her sisters wanted to take
someone off the deed to a rental property, and add someone
else, and the accountant said that this was not allowed, you
couldn't be transferring ownership like that to assign
ownership to the party that would most benefit from the
mortgage deduction, and the depreciation.

The best way for this transfer would be for the relative to
simply put the property in her will, but she thinks that
she's somehow going to save money by adding my wife to the
deed. The house is worth about $1,000,000 now, and it's
basically all that's in the estate. There is no immediate
danger of death either, the relative could easily live
another 30-40 years.

Any comments?

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Posted by Stuart A. Bronstein on November 17, 2006, 11:11 pm
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> I have a relative that wants to add my wife to the deed of
> her house, so that when she dies my wife will get her house.
>
> From what I have read, this is a bad way to transfer real
> property.

Right.

> First, it appears as if it would trigger an immediate
> reassessment under Prop 13 (this is in California, and what
> I read is that only parties with a security interest in the
> property, or a spouse or a child can be added to the deed
> without a reassessment).

Transfers to children are also exempt, but not to other
relatives.

> What isn't clear is if the addition of a party (not a spouse
> or child) to the deed be considered a gift of half the value
> of the property, and if it would trigger a gift tax. It is
> essentially a gift of half the equity in the property.

It's unclear legally as well. Technically it is a gift.
But if your wife doesn't contribute any money to purchase
the property, the IRS still considers it owned 100% by her
relative (assuming it goes into joint tenancy).

> The best way for this transfer would be for the relative to
> simply put the property in her will, but she thinks that
> she's somehow going to save money by adding my wife to the
> deed. The house is worth about $1,000,000 now, and it's
> basically all that's in the estate. There is no immediate
> danger of death either, the relative could easily live
> another 30-40 years.

The best way is to put the property into a trust. It will
go to your wife when the relative dies, without probate. It
will not trigger a Proposition 13 property tax increase now
(but it will when the relative dies).

Stu

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<< that may be imposed upon the taxpayer. >>
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Posted by Drew Edmundson on November 17, 2006, 11:11 pm
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> I have a relative that wants to add my wife to the deed of
> her house, so that when she dies my wife will get her house.
>
> From what I have read, this is a bad way to transfer real
> property.

snip

> What isn't clear is if the addition of a party (not a spouse
> or child) to the deed be considered a gift of half the value
> of the property, and if it would trigger a gift tax. It is
> essentially a gift of half the equity in the property.

From your message I assume the relative will remain in the
home until she dies. Thus it is a gift of a remainder
interest. The value is not half the value of the home but
is a discounted amount based on the life of the donor and
the appropriate discount factor. Since it is not a gift of
a present interest, the annual exclusion does not apply. At
death the entire value is still included in your relative's
estate at its then current fair market value. So the
transfer saves absolutely zero in federal estate tax (I
don't know CA estate law).

All the gift saves is the cost of probate. A living simple
trust would seem to be a better way to accomplish your
relative's goal if it truly is just to avoid probate costs.

snipped the rest

---
Drew Edmundson, CPA
Cary, NC

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Stuart A. Bronstein on November 18, 2006, 11:48 pm
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>> What isn't clear is if the addition of a party (not a spouse
>> or child) to the deed be considered a gift of half the value
>> of the property, and if it would trigger a gift tax. It is
>> essentially a gift of half the equity in the property.

> From your message I assume the relative will remain in the
> home until she dies. Thus it is a gift of a remainder
> interest. The value is not half the value of the home but
> is a discounted amount based on the life of the donor and
> the appropriate discount factor. Since it is not a gift of
> a present interest, the annual exclusion does not apply. At
> death the entire value is still included in your relative's
> estate at its then current fair market value. So the
> transfer saves absolutely zero in federal estate tax (I
> don't know CA estate law).

California just uses the pick-up tax.

The other thing this kind of scheme does is prevents part of
the basis of the property from getting a stepped up basis on
the death of the transferor, meaning higher income taxes
when the place is later sold.

Stu

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by A.G. Kalman on November 19, 2006, 10:14 pm
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Stuart A. Bronstein wrote:

>>> What isn't clear is if the addition of a party (not a spouse
>>> or child) to the deed be considered a gift of half the value
>>> of the property, and if it would trigger a gift tax. It is
>>> essentially a gift of half the equity in the property.

>> From your message I assume the relative will remain in the
>> home until she dies. Thus it is a gift of a remainder
>> interest. The value is not half the value of the home but
>> is a discounted amount based on the life of the donor and
>> the appropriate discount factor. Since it is not a gift of
>> a present interest, the annual exclusion does not apply. At
>> death the entire value is still included in your relative's
>> estate at its then current fair market value. So the
>> transfer saves absolutely zero in federal estate tax (I
>> don't know CA estate law).

> California just uses the pick-up tax.
>
> The other thing this kind of scheme does is prevents part of
> the basis of the property from getting a stepped up basis on
> the death of the transferor, meaning higher income taxes
> when the place is later sold.

There is no CA pick-up tax as the state death tax credit
became zero in 2005.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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