Putting Your Heirs on Title so They Inherit Your Home May Not Be the Best Strategy

It’s a common practice for seniors to add their children or other would-be heirs to the title of their home, but that well-intentioned act could end up costing those heirs increased capital gains taxes when they sell the property later on.

Let me explain.

I’m not a tax advisor or accountant, but I’ve learned the following. If you add an heir to the title of your home as “joint tenant with right of survivorship” and you die, the heir becomes the owner once your death certificate is filed with the county clerk and recorder. But that heir also inherits the “basis” for your home.

The basis is what you paid for your home when you bought it, plus any capital improvements made over the years. When your heir goes to sell your home after your demise, they will be subject to capital gains tax for the increase over that basis.

Let’s say you purchased your home in the 1960s or 1970s for $30,000.  It may be worth over $500,000 now.  Even if the basis is increased to $100,000 thanks to improvements plus the cost of selling it, your heir will pay capital gains tax on $400,000. That comes to about $80,000 in combined state and federal taxes on that $400,000 gain.

However, if you don’t add that heir to the title of your home and let him or her inherit the home through your last will and testament, the basis is stepped up to the home’s value at the time of your death, and that capital gains tax liability disappears.

Talk to your tax advisor and a lawyer about this issue. It is easy to remove your heir from the title to your home through a simple “quit claim deed.”  The form is widely available online.