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Add son's name as co-owner of home?

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mom003

Junior Member
What is the name of your state? Hawaii

We no longer live in Hawaii. One of our 3 children is living in our Hawaii home with his wife. They would like to remodel. We are thinking of adding that child's name as co-owner of the home, so that he would qualify for lower-priced home equity loans and can also claim remodeling expenses as deductions. We would like to have all assets equally divided among the 3 children, so we're hoping to write up our trust (we haven't done so yet) so that our son will get his 1/3 of the total assets, minus the value of his portion of the Hawaii home (older home but renovated in one section, perhaps worth $450,000). Will this work? Also, is the savings on the loan and his deduction worth the cost of changing ownership names, capital gains for our son, etc? And when renovations start, will our signatures be required regularly? Can this be done via mail or fax or email? What will a lawyer charge for adding his name to the deed?

Our son has always been our #1 supporter and always helps us out. We fully trust our son's intent, and all 3 children are very open-minded and understanding. We just want to make sure that this strategy will actually be beneficial.

Looking forward to and and all suggestions and comments!! Thank you! :)
 
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FlyingRon

FlyingRon

Senior Member
You should make sure you understand (and I think you do) that you don't just "add a co-owner", you transfer some part of the property that you own to the the other party.

If you're financially secure, don't live in the property nor intend to live there, and don't need to excercise direct control of the property, etc... then you get around the first reason I recommend people don't do this.

The biggest downside for your son is that he picks up your (presumably low) basis on his share. If he inherits it either by will or through the trust on your death, he would get the stepped up basis at the time of your death.

If he becomes an owner, yes he becomes eligible for deducting taxes and interest that he becomes liable for (and pays). What that deduction is worth to him depends on his overall tax situation. See a CPA (or other legitimate tax professional).

Is there a preexisting mortgage that he is not on? It's not clear from your wording if you're talking about interest payments on the remodel loan or an existing one.
 
M

mom003

Junior Member
It would be fine with us to give the house (or 1/3 of it) to one of our 3 children, because they would equally receive our assets later. It's just that one child would get part of his benefits earlier. We have worked hard and saved, so we have a home for ourselves in another state, and the Hawaii home is an extra.

FlyingRon, thank you so much for explaining that he would be losing out in a way, because he picks up on our basis on his share. Yikes. Does he pay the capital gain when his name is added, or upon our passing? We only paid $150,000 and it might now be worth $450,000 (real estate in Hawaii is gold). What if we have the house appraised before he becomes 1/3 owner? Would that help?

He does not have a preexisting mortgage. This would be his first major loan. He hopes to get a home equity loan, use that money to remodel, then claim the interest payments on the remodel loan at tax time. I'm not good at these things, but I think that's his plan.

I have heard about a gift tax. Is this something we pay, or he pays? A friend of ours even mentioned the possibility of selling the home to our son for $10, just to avoid the gift tax. How costly is the gift tax?

We're trying to look into the various concerns and options, because we don't want our son (or ourselves) later regretting the "wonderful idea" that was hatched with good intentions. I called the state tax office but I was told that I need to ask a lawyer or tax preparer. I understand that, but we're first trying to look carefully at the various options, and choose what will work best for our family.
 
LdiJ

LdiJ

Senior Member
mom003 said:
It would be fine with us to give the house (or 1/3 of it) to one of our 3 children, because they would equally receive our assets later. It's just that one child would get part of his benefits earlier. We have worked hard and saved, so we have a home for ourselves in another state, and the Hawaii home is an extra.

FlyingRon, thank you so much for explaining that he would be losing out in a way, because he picks up on our basis on his share. Yikes. Does he pay the capital gain when his name is added, or upon our passing? We only paid $150,000 and it might now be worth $450,000 (real estate in Hawaii is gold). What if we have the house appraised before he becomes 1/3 owner? Would that help?

He does not have a preexisting mortgage. This would be his first major loan. He hopes to get a home equity loan, use that money to remodel, then claim the interest payments on the remodel loan at tax time. I'm not good at these things, but I think that's his plan.

I have heard about a gift tax. Is this something we pay, or he pays? A friend of ours even mentioned the possibility of selling the home to our son for $10, just to avoid the gift tax. How costly is the gift tax?

We're trying to look into the various concerns and options, because we don't want our son (or ourselves) later regretting the "wonderful idea" that was hatched with good intentions. I called the state tax office but I was told that I need to ask a lawyer or tax preparer. I understand that, but we're first trying to look carefully at the various options, and choose what will work best for our family.
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You would have to report the "gift" because it is higher than 12k. However, there would be no actual gift tax due unless you have exceeded your lifetime exclusion for gifting (currently 1 million)

Selling the house to him for 10.00 is the same as gifting it to him, so that doesn't help you. In fact, if that worked, you would make the situation even worse, because his basis in the house would then become 10.00.

You have 150k in basis. If the house is work 450k then his potential capital gain would be 150k (half of the difference between your basis and the fmv). That would only become an issue when/if he ever decides to sell the property. However, since its apparently his primary home, he would also be able to exclude 250k of capital gain from tax (500k if he is married) so its not necessarily as bad as it looks. Also, any additional money that he puts into the home increases his basis as well.
 
FlyingRon

FlyingRon

Senior Member
Just to reiterate what Ldij said with respect to your question.
He owes the capital gains tax when he sells (not on the gift or death).
If he lives there for two years as his primary residence, he gets to exclude $250,000 of that profit.
 
M

mom003

Junior Member
Wow, thank you, all of you, for all of your responses. We are learning so much through this website and kind people like FlyingRon, LdiJ, and seniorjudge. We still have so much more to figure out about avoiding huge tax pitfalls, about taking care of our homes in the best way for ourselves and our children, and about setting up our trust, but we feel more comfortable now about making some initial decisions. Thank you!

By the way, LdiJ mentioned ways to protect the house in case of divorce (which currently seems 0% chance, but who knows) - could you enlighten us on this? Yes, better to cover all bases, especially with regards to ownership of a house! I realize this is moving from a tax question to a different category, but could you please share?

Thanks again, everyone!! :) :) :)
 
LdiJ

LdiJ

Senior Member
mom003 said:
Wow, thank you, all of you, for all of your responses. We are learning so much through this website and kind people like FlyingRon, LdiJ, and seniorjudge. We still have so much more to figure out about avoiding huge tax pitfalls, about taking care of our homes in the best way for ourselves and our children, and about setting up our trust, but we feel more comfortable now about making some initial decisions. Thank you!

By the way, LdiJ mentioned ways to protect the house in case of divorce (which currently seems 0% chance, but who knows) - could you enlighten us on this? Yes, better to cover all bases, especially with regards to ownership of a house! I realize this is moving from a tax question to a different category, but could you please share?

Thanks again, everyone!! :) :) :)
Click to expand...
One way would be through a post nuptual agreement between your son and his wife. A legal agreement that the house remains his separate property in the event of a divorce, and any home equity debt remains his responsibilty as well. Or perhaps that she would share in only any appreciation that took place during the marriage. A good attorney could come up with the proper way to handle that.
 
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