Richard N. Barnes
Passing Real Estate To Your Children
How to avoid costly mistakes and save thousands in taxes
Occasionally, parents believe that a simple way of transferring their home to their children and also avoiding probate is by adding their children’s names to a property deed. Unfortunately, this can actually create more problems than the ones they are trying to avoid.
In Utah, when more than one person owns property together and they are not married, the default form of title ownership is referred to as tenants in common. This means that if one of the owners dies, his or her ownership share does not transfer to the other owner(s). Instead, it goes to the deceased owner’s heirs through probate.
The problems of probate (and there are many) can be avoided if the deed designates property ownership as joint tenants with the right of survivorship. However, there are several big reasons why it may not be advisable for you to deed real estate to your children in this manner, with adverse tax consequences topping the list. This is because deeding property to children is actually considered a gift, and the cost basis for that gift is what you paid for your home.
For example, let’s say you paid $150,000 for your home many years ago. You then add your children to the deed at some point, which the IRS deems a gift. After you die, the children sell the home for the current market value of, let’s say, $550,000. They will be taxed on the difference between the cost basis of $150,000 and the sale price of $550,000 – or $400,000. That’s a huge tax burden you’ve left for your children.
It would be better if your children inherited the property via your will because selling a property that is inherited in a will does not create the same tax liability. When children inherit a property in a will, their tax basis is what the property was worth when they inherited it (that being the current market value of $550,000). This is much better than the example above where they are taxed on a $400,000 difference in cost basis and sales price.
But there is an even better way; much better in fact. While inheriting property through a will does avoid some of the tax issues discussed above, it does NOT avoid probate. The way to avoid tax issues AND probate is by creating a living trust and titling the property in the name of the trust, and naming your children as the trust’s beneficiaries. You avoid – or more accurately, your children avoid – the problems and costs of probate and do so in a tax-advantaged way.
So if you own real estate, give us a call today. We will review your current deed and advise you on the easiest and most cost effective ways to pass it to your children.