Quitclaim Deed questions - add DS for tax break?

[robnplunder]

The house price DW & I bought as new some years ago has appreciated such that we'd realize about $750k profit if it is sold today. That means, we'd have to pay tax on $250k. A bit of looking around found that if I add DS to my house deed, we will pay no tax up to $750k gain. The law stipulates that DS must live in the house 2 of the last 5 years before the sales of home. Well, DS is a full time student and uses my house as his permanent home address.



Please help confirm, share your experience, on the following:

• I can do a Quitclaim Deed to add DS to the house deed.
• After 5 years, I can sell the house and we pay no tax up to $750k of profit.
• DS must have lived in the house for the 2 of the 5 years. This may be a gray area as DS may be using the house for his permanent residency but not physically living in the house for 2 years. This is a loophole I may use?
• As long as the 3 above are met, DS does not have to pay "gift" income tax.

Did I get these right? Anything I need to watch out for? Has anyone done this and willing to share their experience?

 

[cathy63]

Adding your DS to the title of your home is a gift to him of 33% of the value (assuming you'll split it 3 ways), and you need to file a gift tax return if the value of that gift is greater than $15,000. You won't owe any tax now unless you've exceeded lifetime gifts of $11.2M. Your heirs will just have to add the 2019 home value to your estate when determining whether taxes are owed after you die.

Each owner who lives in the home as his/her primary residence for 2 of the past 5 years can exclude $250K of the gain from his/her taxes.

Your DS would never have to pay gift taxes on anything you give him. You would be responsible for paying gift taxes if you exceed the $11.2M lifetime limit.

 

[robnplunder]

Thanks, cathy63.


Sample scenario:


Assuming I bought the house at $450k (inc home improvements), and sold it for $1.2m for $750k profit after 5 years:

• I need to file a gift tax return of $400k.
• $400k is added to my estate for inheritance calculation.
• None of us has to pay tax on $750k gain
• If $400k + the eventual remaining inheritance is greater than 11.2m, I pay gift tax. If not, DS or we don't pay any gift tax.
• We move his guitars, car, his butt into our house and keep him locked in for total of 2 years of the last 5 years we co-owned the house.

 

[beowulf]

I have used quit claim deeds in the past for reasons other than what you are planning. I would strongly advise that you first consult a real estate attorney and a tax expert before doing this. Since this is a binding legal document that will be filed with your county/city/town, you want to ensure that it's legally sufficient and that you have all the correct information on the current and future tax consequences. Once your son is 1/3 owner, the taxing jurisdiction can come after him for his share of the real estate taxes. In addition, if he is ever sued and loses the suit, the courts can come after him for his share of the house. It will probably affect his credit rating in a good way, however, if he is getting student aid, it could be a liability as he would then be a homeowner. He would also not be eligible as a first time buyer whenever he does buy his own home. As I said, it's a lot more complex than it looks.

 

[robnplunder]

Thanks, beowulf!

Once your son is 1/3 owner, the taxing jurisdiction can come after him for his share of the real estate taxes.

I am assuming you are referring to property tax, its rate won't change, and I can continue to pay whole amount as before.

In addition, if he is ever sued and loses the suit, the courts can come after him for his share of the house.

Tiny risk which I can take.

if he is getting student aid, it could be a liability as he would then be a homeowner. He would also not be eligible as a first time buyer whenever he does buy his own home.

Which I can compensate DS out of the house sale's proceed. Benefit outweighs the concerns. If I don't deed him in, I live in CA so the fed+state tax on $250k comes to $120k, not to mention forgoing ACA subsidy, and putting us on different tax rate bracket.



Also, DS being the only child, it's all pieces of a same pie. Money I save by deed'ng him in now will eventually end up in his RE fund.

 

[Maenad]

Also, when you visit the attorney, have your son go with you. The risks Beowulf mentioned are for him as well. This could negatively affect him in ways you don't foresee or intend.

 

[Dash man]

Not to mention your son will have to agree to sell the house, before you can complete a sale. Do you want to give him that power?

 

[joeea]

Anything I need to watch out for?

Be careful of an IRS audit. These are exactly the kinds of moves that could flag your account.

 

[cathy63]

Thanks, cathy63.


Sample scenario:


Assuming I bought the house at $450k (inc home improvements), and sold it for $1.2m for $750k profit after 5 years:

• I need to file a gift tax return of $400k. Whatever 1/3 of the home value is on the day you become co-owners. If the current value is $1.2M and you intend to sell 2 years from now, then the gift is $400K. You'll presumably have some additional gain by the time you sell it.
• $400k is added to my estate for inheritance calculation.
• None of us has to pay tax on $750k gain Your DS' cost basis in the gift is the same as yours, so he has a $150K cost basis. If the house sells for more than $1.2M after you've co-owned it for 2 years, then DS gets to exclude $250K but has to pay cap gains tax on the remainder.
• If $400k + the eventual remaining inheritance is greater than 11.2m, I pay gift tax. If not, DS or we don't pay any gift tax. Well, you would be dead, so you wouldn't be paying any taxes. Your estate would pay the estate tax prior to the final distribution of assets. That estate tax number changes over time, so it might not be $11.2M by the time you die (also I didn't look up the 2019 numbers before posting, so it might already be slightly different).
• We move his guitars, car, his butt into our house and keep him locked in for total of 2 years of the last 5 years we co-owned the house.

You should look into whether it makes sense for you and your wife to each give your son 1/6 of the house rather than having you give him 1/3. It probably doesn't make any difference, but if you're consulting a lawyer anyway (which you should), it's worth asking.

Also, find out what happens to the basis if any one of you dies before selling. I've always heard it's not a good idea to put your children's names on the title of a place you intend to keep on living in, it's much better for them to inherit it and get a stepped up basis; but since you intend to sell, maybe it does make sense in this case.

 

[Brat]

A neighbor did that with her house, didn't tell her kids. One of the "kids" passed away. When it came time to sell the house she had to deal with her daughter-in-law who was at death's door. Her grandchildren could have inherited their father's share. This delayed the sale of the house for at least 6 months.

Frankly, I think this is a bad ideal

 

[OldShooter]

... I would strongly advise that you first consult a real estate attorney and a tax expert before doing this. ... As I said, it's a lot more complex than it looks.

This!

SGOTI is not an attorney that is familiar with property law in your state. I understand the cheapskate and DIY urges because I suffer from them myself, but this is not a time for either. Spend the money to get things done right. As a percentage of what you are dealing with, it is a pittance and the downside of getting this wrong could be huge.

 

[robnplunder]

Thanks for the replies so far. It looks like I have some more homework to do.

 

[robnplunder]

Not to mention your son will have to agree to sell the house, before you can complete a sale. Do you want to give him that power?

We are not the type of family which the question like above will ever happen. He knows we are doing it to reduce paying tax, not giving him power to veto selling the house or not. He will be an uninterested co-conspirator if I ever decided to do this. His lack of interest in financial matters, material things, etc.. has been driving me crazy & is probably a topic for starting another thread.

 

[bingybear]

We are not the type of family which the question like above will ever happen. He knows we are doing it to reduce paying tax, not giving him power to veto selling the house or not. He will be an uninterested co-conspirator if I ever decided to do this. His lack of interest in financial matters, material things, etc.. has been driving me crazy & is probably a topic for starting another thread.

Well documented. When giving a gift... you can't keeps strings on it. Gifts to charities loose some or all the deduction if you get more than incidental benefit. If you donate $ to a church are not completely deductible if you get more than incidental benefit... like the church pays your way on a mission trip.

I'd be careful with this. You really documented very well that this is not a gift.

 

[CaliKid]

I'd hire an estate lawyer to assist you.

 

[PatrickA5]

When you sell the house, does DS get to keep his $400K share?

I'd be careful with this. It's possible the IRS would look at this as a tax avoidance scheme.

 

[skipro33]

Can you put the home in a trust with you, DW and DS? I'm kinda surprised your home already isn't in a trust. It would then be protected from civil lawsuit collection.

 

[Dash man]

When you sell the house, does DS get to keep his $400K share?

I'd be careful with this. It's possible the IRS would look at this as a tax avoidance scheme.

When you sell the house, won’t the title company make a check out to your son for his share of ownership? He’ll have to gift that back to you.

 

[joeea]

It's possible the IRS would look at this as a tax avoidance scheme.

LOL! The IRS would look at this tax avoidance scheme as a tax avoidance scheme? Imagine that!

 

[robnplunder]

Can you put the home in a trust with you, DW and DS? I'm kinda surprised your home already isn't in a trust. It would then be protected from civil lawsuit collection.

We didn't b/c we planned to sell the house and move out of where we live. Also, I have an umbrella insurance coverage.




Pursuing quitclaim deed is on hold for now. Thing appear to be too complex for me to waste my precious ER life. I will just wait for the housing market to crash .