Real Property Transfers: Should I Add My Child to My House Title Now or After Death?
Can I avoid estate planning if I add my adult child to the title of my house right now? This is an all too common question people have. Although it seems like a simple transaction, i.e., drafting a deed to include your adult child as the owner, there can be significant consequences. And you cannot undue the ownership change without additional consequences.
In California, when you add an individual to the title of the house or transfer the entirety of the title to the individual, that is considered a change in ownership*. This is true regardless or not if there was a sale or a gift. This means that transferring title of your house to your adult child or adding them to the title, whether or not they paid you, is a change of ownership. What is the significance to this characterization?
- Reassessment and Increase in Property Taxes: Whenever there is a change in ownership, the County Assessor’s office is required to be notified by the property owner on the proper forms. The County Assessor will then reassess the property (or portion of it) and likely increase the property taxes if the current market value is higher than during the previous assessment.
There are a few exceptions. One most common exception that is applicable to these scenarios is the Parent-Child Exemption. However, due to the passing of Proposition 19 in 2019, that exemption has become greatly limited. The property at issue must be the primary residence of the parent/child and must become the primary residence of the transferee parent/child. Additionally, the value of transfer that is excluded is up to $1 million which, in many places in California these days, is surpassed.
While this reassessment would happen whether the property is transferred during your lifetime or after your death, this is something to consider based on current finances.
- Loss of Step Up in Basis: When you inherit assets at someone’s death, you receive a step up in basis of that asset. This means that if you inherit real property at death, the cost basis of the real property is stepped up to the current day value. Therefore, if you then sell it at a future date, you could have a significantly reduced capital gain or none at all. If the property was community property, the basis gets the benefit of stepping up twice – once at the death of the first spouse and again at the death of the surviving spouse. If you add your child to title while you are living, that child keeps your original cost basis in the real property.
- Effect on Personal Taxes: Any transfer of real property could have an effect on your personal taxes and/or the taxes of the newly added owner or the new sole owner. It is important you understand how this could affect your own taxes, such as gift tax implications, as well as your adult child’s taxes.
- Missed Expectations/Not Estate Planning: It is not uncommon to see a parent add one child to the house title and believe that this child will share the house with his/her siblings after the parents passes. However, that child will not be legally obligated to do anything once title is in his/her name. If the parent transferred the real property to a trust instead of to a child, the parent could have control over who inherits it, when, and any contingencies.
Each person’s circumstance is different and for proper advice, it is important to consult with an attorney regarding your situation. If you want to learn more about how an estate plan might help your real property goals, please contact us at 424-242-5021 or at firstname.lastname@example.org for a complimentary consultation.
Nothing in this article should be construed as legal advice. For specific guidance regarding your situation, please contact an attorney.