Many clients come to me with the intention of transferring the deed to their home to their children in order to avoid the property being a part of their probate estate. Many also consider this in an effort to preserve the asset from being sought after for payment of medical bills or nursing home bills. There are several facts that you must be aware of prior to finalizing such a transfer of ownership.
1. Gift tax and Capital Gains tax consequences– The transfer will be treated as a gift by the parent to the children and will be subject to gift tax to the extent that the value exceeds the yearly allowable gift tax exemption. Additionally, your children who received the gift, will acquire the cost basis (value of home when you purchased).. Thus, when the property is sold they will pay capital gains tax on the difference between what you paid for the property and the present sales price. Had the deed remained in your name and they inherited the property by will or trust, they would have received the stepped-up basis on the property( value at the time you died) and thus would pay substantially less in capital gains taxes.
2. Real Estate Tax consequences– If you receive a senior citizen tax exemption or veteran’s exemption, this reduction in the tax bill may be lost upon the transfer of the deed.
3.Mortgage may prohibit transfer– If you have a mortgage on the property, it probably contains a provision that prohibits a transfer of the property without first obtaining their consent. It should be noted however that federal law permits transfers to certain trusts and family members under certain circumstances without violation of the terms of the mortgage. However, a review of the applicable law and the mortgage should be undertaken prior to any transfer to assure that any lender consents that may be required are obtained.
4. Title Insurance Policies can be voided by a transfer of ownership.- Check with your Title Insurer on the steps necessary to continue your title insurance protection. Usually it is as simple as paying for an inexpensive rider to the policy.
So no matter how simple the real estate transfer may seem to be since it is only between family members, take the time to seek legal advice and tax advice so that your good intentions translate into the best plan for your family.
For additional advice on this or any other legal matter , please contact The Law Office of William J. Reinhardt, Jr. at 718-377-8880 or send an e-mail to firstname.lastname@example.org.