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
A common scenario is for a parent to add a child to the title of the parent's home (usually using a quitclaim deed).
oth 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.
(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 (or co-signing).
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
- 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)
You can read all about my executor story at How to Probate an Estate.
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