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Law Offices of Ronald W. Rutz
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February 8, 2003: What Can't I just Give my House to my Kids?

Q: I do not understand why I cannot just give away my house to my kids. I thought that as long as the value was under $250,000, there is no problem. Why do you attorneys make things so hard?

A: I am sorry that you dislike attorneys so much but attorneys did not create the need for you to make decisions. Attorneys serve as a guide to help you make the best choices for you from your perspective.

I have previously examined the legal problems associated with having other names on the house deed, but let's highlight the tax considerations since you brought that up.

You are confusing several different issues. Even if you stay on title but add one or more names to the deed, a gift has been made of the equity in the house. For example if the house without any mortgage is worth $240,000 and you put two names on the deed with you, then a gift of $160,000 has been made (2/3 of $240,000).

Since a person can only give away tax-free $11,000 per person per year, a taxable transfer of $138,000 ($160,000 - 22,000) has occurred. The gift tax on that amount would be approximately $65,000 that you must pay to the federal and state governments just because you put two names on the deed, unless you file the appropriate federal and state gift tax returns deducting $138,000 from your estate deduction of $1,000,000.

But look at what you did, even if you avoided paying the $65,000 tax. As things stand, if you would ever sell the house (assuming that you would otherwise qualify), you can avoid, as a single person, capital gains tax on the first $250,000 of appreciation. But, by transferring two-thirds of the title, the capital gains tax shelter only remains on your one-third share, and a tax of 20% must be paid on the gain of the part of the house in the names of the other two.

If, instead of putting the two names on the deed, the property was transferred from you to them by inheritance, the transferees would receive a "new" basis so at a later sale, the first $250,000 (assuming that was the value of the house at your death) would not generate any tax.

Also remember that you might not be entitled to the entire property tax exemption that you are currently enjoying if you put other names on the title.

There are many other practical ramifications but the other most serious consequence is that your insurance rates could spike up because the home is not "owner occupied" any more. Technically, you are "renting" two-thirds of the house and possibly the others on the deed would even have to list the "reasonable rent" on their tax returns even if you pay none.

Changing title to the house is easy—just executing and recording a deed. The first question is not why do "attorneys" make things so hard, but rather, why give the house in the first place? You want to make the right decision, so it is better to explore your options to see if there is a better choice to meet your goals than simply transferring the house. And helping you will be a lot easier if you stop stewing and venting against attorneys.

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