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Joint Ownership

Joint ownership with rights of survivorship is a common form of property ownership.

One benefit of it is that the property passes to the surviving owner without having to go through probate. So, joint ownership is one way of avoiding probate.

A common scenario is for a parent to add a child to the title of the parent's home (usually using a quitclaim deed).

Both parent and child think this is a good idea because, when the parent passes away, the house will be owned entirely by the child without having to go through the expense and delay of probate.
Unfortunately, this is usually a really bad idea. In fact, sometimes it can result in disaster.

One (non-tax) problem is that creditors of any joint owner (i.e. the child) can attach the joint owner's debt to the property and eventually force the sale of the house to collect the debt.

But, there are also several negative tax consequences of joint ownership.

First, when the child is made a joint owner, he is really receiving a gift of the value of his or her share of the home. Assuming this value is above the $12,000 annual gift tax exclusion, the parent may have to pay gift tax.

Second, the end result often is that the child has to pay substantial unnecessary capital gains tax. For instance, in the above situation, if child received the home through inheritance, child would receive a basis in the home equal to its fair market value at the time of parent's death. Say the home is worth $500,000. It could have passed free of any estate tax to child. Child would receive the home with a "stepped up" tax basis of $500,000. He could immediately sell the home for $500,000 and owe no capital gains taxes. However, if child obtained a half interest in the home, while parent was living, then child's tax basis in his half of the home would be the same as parent's (potentially 0). Therefore, when child later sells the house he only has a $250,000 basis (basis received from inheritance of parent's half) in the house and thus $250,000 of capital gain to pay taxes on.

Third, if both parents are alive when the child is added to the deed, the first parent to die may effectively waste his or her estate tax exemption. To understand how this can happen, read tax avoidance purpose trust.

It is rarely a good idea for parents to quit-claim the deed to their home to their children. If the point is to avoid the house having to go through probate, a much better option would be to put the home into a living trust. (see avoid probate)

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