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Adding a party to a real estate deed, what are the tax implications?

I have a relative that wants to add my wife to the deed of her house, so that when she dies my wife will get her house. From what I have read, this is a bad way to transfer real property. First, it appears as if it would trigger an immediate reassessment under Prop 13 (this is in California, and what I read is that only parties with a security interest in the property, or a spouse or a child can be added to the deed without a reassessment). Second, it may require a new mortgage, since the mortgage company has the right to call the loan if parties are added or removed from the mortgage. Since the current mortgage is at 4%, there is a big incentive for the bank to call the loan, and a new mortgage would be at about 6%. What isn't clear is if the addition of a party (not a spouse or child) to the deed be considered a gift of half the value of the property, and if it would trigger a gift tax. It is essentially a gift of half the equity in the property. I remember that my wife and her sisters wanted to take someone off the deed to a rental property, and add someone else, and the accountant said that this was not allowed, you couldn't be transferring ownership like that to assign ownership to the party that would most benefit from the mortgage deduction, and the depreciation. The best way for this transfer would be for the relative to simply put the property in her will, but she thinks that she's somehow going to save money by adding my wife to the deed. The house is worth about $1,000,000 now, and it's basically all that's in the estate. There is no immediate danger of death either, the relative could easily live another 30-40 years. Any comments?

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Reply to
SMS
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Right.

Transfers to children are also exempt, but not to other relatives.

It's unclear legally as well. Technically it is a gift. But if your wife doesn't contribute any money to purchase the property, the IRS still considers it owned 100% by her relative (assuming it goes into joint tenancy).

The best way is to put the property into a trust. It will go to your wife when the relative dies, without probate. It will not trigger a Proposition 13 property tax increase now (but it will when the relative dies). Stu

Reply to
Stuart A. Bronstein

snip

From your message I assume the relative will remain in the home until she dies. Thus it is a gift of a remainder interest. The value is not half the value of the home but is a discounted amount based on the life of the donor and the appropriate discount factor. Since it is not a gift of a present interest, the annual exclusion does not apply. At death the entire value is still included in your relative's estate at its then current fair market value. So the transfer saves absolutely zero in federal estate tax (I don't know CA estate law). All the gift saves is the cost of probate. A living simple trust would seem to be a better way to accomplish your relative's goal if it truly is just to avoid probate costs. snipped the rest

Reply to
Drew Edmundson

California just uses the pick-up tax.

The other thing this kind of scheme does is prevents part of the basis of the property from getting a stepped up basis on the death of the transferor, meaning higher income taxes when the place is later sold. Stu

Reply to
Stuart A. Bronstein

There is no CA pick-up tax as the state death tax credit became zero in 2005.

Reply to
A.G. Kalman

Then it's a good thing I don't do estate tax returns any more. Stu

Reply to
Stuart A. Bronstein

Actually, this may not be the case. She may decide to rent out the house and move into another property, that she owns jointly with my wife and one other sister. In that case it becomes more complicated, since then there is income to be split and declared, and depreciation on the rental to be split and claimed. Or not, as we've been losing out on claiming losses on another rental, due to income restrictions on maximum loss. In any case, at least now I have independent corroboration on the benefit of doing a trust, or just putting it in the will. I think that she thought that a good way to avoid probate would be to add a person to the title, but she didn't understand the implications in terms of property taxes. Thanks for all the advice.

Reply to
SMS

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