My father buys a house near my family in California. Should he add me to the deed so that I can inherit it easily?
My father, who lives in Tennessee, is considering buying a house near my family in California. He owns and owes nothing to his primary home in Tennessee and plans to keep it so that he can live here half the time and the other half of the year.
I am an only child and the only person named in his will. He plans to leave everything to me. Would it make sense for him to put my name on the California home deed? That way, if he passes, would I just own it with no inheritance or tax issues? And if I should die unexpectedly; the house would still be 100% his.
I do not intend to invest any money in the house but will do the basic maintenance for him, keep an eye on the house when he is not there, help him travel between houses and possibly supervise if he decides to rent it when he is not here.
Only child in California
‘The Big Move’ is a MarketWatch column about the ins and outs of real estate, from looking for a new home to applying for a mortgage.
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How lucky you are to have a father who is thoughtful enough to consider such a large purchase to spend more time close to you and your family. You’re right if you approach this decision carefully, and it seems neither you nor your father are rushing into it. These are all good things to hear.
You are right that all of you can avoid the probate process with this second home by having your father put you on the deed when he buys the property. By doing so, the two of you would be joint owners, so ownership would pass to you upon his death and vice versa.
While in reality you may not be investing any money in the property, in the eyes of the law you would own 50% of the property from the start. And that’s where problems can arise. If you were past due on a debt you owed, creditors could pursue your share of the second home, endangering your father’s ability to live there.
“If the child is guilty of a car accident, sued for negligence, or owes money to a spouse or creditor, your home can be used to settle claims against him,” said Roman Aminov, an estate planning and senior citizen attorney. in New York City. york, wrote in a blog post.
Another consideration is whether you are currently married or not. Let’s say it does – and let’s imagine the marriage dissolving, as many unfortunately do. Your ex-husband could try to claim that your share of the home owned with your father was a matrimonial property. In California, which is a community of property, spouses are entitled to 50% of the matrimonial property upon divorce.
So suddenly, in this scenario, your ex-husband would be a partial owner of this house, without some messy legal maneuvering.
Co-ownership of a property can pose a legal risk if one of the owners is in debt.
Co-ownership can be complicated in other ways. You don’t say whether your father plans to use a mortgage to buy the property, but if he does, the two of you should discuss whether you are a co-signer of the loan or not. If you get rid of the loan, the situation may become a bit more complicated. But being in the loan would put you (and your credit score) on the hook if your dad ever missed a mortgage payment.
Putting your name on the deed before your father dies would also prevent you from claiming some important tax exemptions. When a child inherits a house from their parent, they receive an increase in the base for capital gains purposes. This is useful when calculating the taxes due once the home is sold.
Let’s say the house eventually sells for $500,000, but your father 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 house (plus the cost of any improvements to the property). So you owe tax on $300,000 in capital gains.
However, if you inherited the house in a different way, you are entitled to a step-up basis. This tax strategy allows the heir to use the value of the property when the owner died as a basis, rather than the value when the home was originally purchased. So in this hypothetical scenario, the incremented basis would mean that you only owe tax on $50,000 in capital gains.
Home prices continue to rise at a rapid pace in much of California, despite what the critics are saying.
While many people are suggesting that the California housing market will bottom out, that remains to be seen. Indeed, in San Diego, house prices have risen by 25% in the past year. So it’s easy to imagine a situation where the second home your father buys increases in value significantly between now and the time he eventually dies. A more typical inheritance process would allow you to take advantage of these capital gains loopholes to prevent a high tax bill from getting worse.
There are other ways to avoid probate on inherited property than joint ownership. An example is having your father establish a living trust. Your father could set up a trust, place the second home in that trust, and name himself as a trustee during his lifetime. He could then appoint you as successor, so that you would manage the assets of the trust after his death. Since the property would technically belong to the trust and not directly to your father, it would not be involved in the probate process (although it would still be relevant for federal tax purposes).
I would suggest that when your father chooses to buy his second home, he hires a real estate agent who is also familiar with wills and inheritances. They can guide your family to the best solution so that you can avoid these legal headaches if your father passes away. Whichever solution you choose, I’m sure spending more quality time together will be something that both you and your dad will cherish for years to come.