I got this tax question from a client recently: “Should I include my kid’s’s name on my home?”
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
You see, you might think it’s a good idea to include your kid’s name on the title of your home in case something happens to you. However, that might be a bad idea. Here are five reasons why:
No gain exemption
You are allowed to exclude up to $250,000 of gain on the sale of your home ($500,000 if you are married). However, the exclusion is only available if you owned and used it for at least two out of the last five years. So if your kid does not live in your home for that time period, the portion of his/her gain will be fully taxable.
Home equity risk
If your kid got title to your home as a full or partial owner, a creditor may file a lien on the property for any of your kid’s debts. Worse, your home could be lost if your kid is involve in an accident or a lawsuit.
If you transfer the full title to your kid, your kid will now have 100% control re: your home. If your kid decides to sell the property or take out a loan against your home, you cannot do anything about it.
Under some scenarios, if you gift your home to your kid, it could be considered a gift for Medicaid purposes. That means, if you kid subsequently sells your home, you might not qualify for Medicaid benefits in the event of a major long-term health problems.
Gift tax return requirement
If your kid received more than $14,000 of equity in your home as a gift, you need to file a gift tax return. However, regarding the gift tax payable, you can use up your $5.5 million lifetime exemption in order not to pay any gift taxes.
So the question right now is: “What is the LowerMyTaxNow strategy?” If the purpose of the title transfer is for your kid to easily get the home at your death or so your kid can manage your affairs, then I would recommend setting up a living trust, along with powers of attorney, so your kid can manage your financial affairs.
If the reason is to help your kid buy his or her first home, a better way is to lend your kid the money with an IRS-approved interest rate (low and reasonable), and set up a program to give annual gifts in the form of principal forgiveness.
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.