By: Susan Marra
Many times attorneys are approached by clients wanting to transfer title to their homes or other real estate to their children, or to add their children to the title so that the children and parent become co-owners. Often the intent of the client is to avoid taxes or simplify the probate of their estate. In some situations, a transfer is the right decision. However, frequently doing so has unintended consequences and creates problems. This article discusses some of the issues that may arise in a transfer by a parent to a child.
When a property is liened by a mortgage, most loan documents will prohibit transfer of property without the lender’s consent. If the property is conveyed without the lender’s consent, the owner may be in default under the loan permitting the lender to immediately demand full repayment of the loan.
Transfer of property to avoid collection of an outstanding debt by a creditor, may be fraudulent and subject the owner to severe penalties.
If the property is gifted or not sold for its fair market value, the transfer may affect Medicaid eligibility, and the proper timing of an application for Medicaid. The length of ineligibility will depend on a number of factors including the amount of the gift to the child (i.e., the fair market value of the property interest conveyed). During the period of ineligibility, the parent must pay for his own care in a nursing home.
Transfer of the property may eliminate or reduce the right to a real estate tax reduction under the New Jersey homestead benefit program and tax reductions/exemptions for senior citizens, veterans, disabled persons and surviving spouses.
There are gift tax consequences if a person gives property with a value in excess of the annual exclusion amount (in 2017-$14,000 per year to any one person). Depending on the value of the interest in the property gifted, a gift tax may be due. In all cases where a gift exceeds the annual exclusion amount, the excess must be reported by the filing of a gift tax return. Although spouses may combine their annual exclusion amounts, ordinarily couples must file a gift tax return and consent on each other’s return to gift-split. All gifts that are not of a present interest must be reported, no matter what the amount. A gift of a life estate interest in real estate is not considered a gift of a present interest and, in addition to the reporting requirement, will not qualify for the annual exclusion from gift taxes.
If the property is gifted to the children without retaining a life estate interest, the children will have a carryover tax basis. As a result, the children will have to pay capital gains tax on the increase in value of the property from the time of purchase by the parent (subject to certain permitted adjustments) to the date of sale. However, if the property is not conveyed prior to death of the parent but instead is inherited by the children upon death, the property will have a stepped-up basis. In that event, the children will only have to pay capital gains tax on the increase in value from the date of death to the sale date. In addition, in some instances, a parent may exclude $250,000 ($500,000 for a couple) of gain upon the sale of owner-occupied property during his lifetime. Owners who do not live in the home are not eligible for the income tax exclusion and must pay capital gains tax on their share of the gain.
In conclusion, although many parents want to convey their home, or an interest in it, to their children in an attempt to avoid probate or taxes, such action may cause unanticipated problems. The decision to transfer may be the right one for an individual, but no transfer should be made without due consideration of possible future problems after consultation with legal and tax counsel.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.