Dear MarketWatch,
My father, who lives in Tennessee, is considering purchasing a home near my family in California. He owns and owes nothing on his primary home in Tennessee and plans on keeping it so he can live half of the time there and the other half of the year here.
I am an only child, and the only person named in his will. He plans on leaving everything to me. Would it make sense for him to put my name on the deed of the California house? That way when he passes I’d just own it with no probate or tax issues? And if I were to die unexpectedly; the house would still be 100% his.
I’m not planning on investing any money into the house, but will be doing basic maintenance for him, keeping an eye on the house when he’s not here, helping him travel between homes, and possibly overseeing it if he decides to rent it when he’s not here.
Sincerely,
Only Child in California
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected].
Dear Child,
How lucky you are to have a father who is so considerate as to consider such a major purchase in order to spend more time close to you and your family. You’re right to approach this decision carefully, and it does seem like neither you nor your father are rushing into it. These are all good things to hear.
You’re correct that you all could avoid the probate process with this second home by having your father list you on the deed when he purchases the property. In doing that, the two of you would be joint owners, so the property would pass to you upon his death and vice versa.
Although you might not be investing money into the property in reality, in the eyes of the law you would own 50% of it from the get-go. And that’s where problems could arise. If you were to be delinquent on some debt you owed, creditors could go after your share of the second home, jeopardizing your father’s ability to live there.
“If the child is at fault in a car accident, is sued for negligence, or owes money to a spouse or creditor, your house can be used to satisfy claims against him,” Roman Aminov, an estate planning and elder law attorney in New York, wrote in a blog post.
Another consideration is whether or not you’re currently married. Let’s say you are — and let’s imagine that the marriage dissolves, as many unfortunately do. Your ex-husband could attempt to claim that your share of the home jointly owned with your father was a marital asset. In California, which is a community property state, spouses are entitled to 50% of marital assets upon divorce.
So suddenly, in this scenario, your ex-husband would be a partial owner of this home, without some messy legal maneuvering.
“ Joint ownership of a property could put it at legal risk if one of the owners has outstanding debts. ”
Joint ownership can be complicated in other regards. You don’t say whether or not your father is planning to use a mortgage to buy the property, but if he does the two of you would need to discuss whether you’d be a co-signer on the loan or not. Leaving you off the loan might make the situation somewhat more complicated. But by being on the loan, you (and your credit score) would be on the hook if your father ever missed a mortgage payment.
Putting your name on the deed before your father dies would also preclude you from claiming some important tax exemptions. When a child inherits a home from their parent, they receive a step-up in basis for capital gains purposes. That’s useful when calculating the taxes owed once the home is sold.
Let’s say the home is eventually sold for $500,000, but your dad originally paid $200,000 for it and it was worth $450,000 when he died. In this case, if you were added to the deed that basis would be based on what their parent paid for the home (plus the cost of any improvements made to the property.) So you would owe taxes on $300,000 in capital gains.
However, if you inherited the home another way, you would be entitled to a step-up in basis. This tax strategy allows the heir to use the property’s value when the owner died as the basis, rather than its value when the home was originally purchased. So in this hypothetical scenario, the stepped-up basis would mean you would only owe taxes on $50,000 in capital gains.
“ Home prices continue to rise at a fast pace across much of California, despite what the critics say. ”
While many people suggest that California’s housing market is going to bottom out, that’s yet to be seen. Indeed, San Diego has seen home prices rise 25% over the past year. So it’s easy to imagine a situation in which the second home your father buys appreciating in value considerably between now and when he ultimately passes away. A more typical inheritance process would allow you to take advantage of these capital gains loopholes to avoid a large tax bill adding insult to injury.
There are other ways to go about avoiding probate on inherited property than joint ownership. One example is by having your father establish a living trust. Your father could create a trust, put the second home in that trust and name himself as trustee during his lifetime. He could then name you as a successor so that you would manage the trust’s assets upon his death. Because the property would technically belong to the trust and not your father directly, it wouldn’t be implicated in the probate process (though it still would be relevant for federal tax purposes.)
I would suggest that when your father chooses to purchase his second home, he hire a real-estate attorney who is also familiar with matters of wills and inheritance. They could guide your family to the best solution so that you can avoid these legal headaches when your father passes away. Whatever solution you land on, I’m sure getting to spend more quality time together will be something both you and your father cherish in the years to come.
Add Comment