Do you have a friend or family member who wants to add you to the deed of their home?
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Even though they may have good intentions, there are certain things you need to consider before signing the paperwork because they could have a significant impact on your finances down the road.
Within this article, we will discuss four things you need to know before you’re added to someone else’s deed.
You’re Sharing the Equity — But It Might Not Be Immediately
When you’re added to the deed of someone else’s home, you gain access to its equity. However, depending on how the deal is structured, it might not be immediate.
“While it’s common knowledge that property ownership implies equity, what people might not realize is that some arrangements involve a gradual vesting of that equity,” said Josh Browning, CEO of Guardian Rock Wealth and author of Build a Life, Not a Portfolio. “This is more common in situations like shared ownership among family members or business partners.”
Browning gave this example: “For instance, if siblings inherit a property and decide to share ownership, their equity might vest over a predetermined period. This means that the full ownership rights and benefits don’t kick in immediately but accrue gradually.”
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You’re Taking on Liability
One thing many people don’t realize is that when you’re added to someone’s deed, you are taking on added liability.
“People often assume that once they’re added to a deed, all legal matters are settled,” said Browning. “However, they might not be aware that being added to the deed exposes them to potential future liabilities. For example, unresolved issues with the property’s title, such as undiscovered liens or legal disputes, the new owners can become entangled in these problems.”
Before agreeing to any type of arrangement, it’s important to do a deep dive into the property records and ensure there aren’t any red flags. It’s also a good idea to consider having a title insurance policy to protect both parties.
It Can Impact Financial Aid
If you plan to use financial aid for college, being on the deed of a home could cause some unintended complications. Be sure you consider the impacts and look at all your options.
“Certain financial aid programs consider home equity part of the family’s assets,” Browning said. “If a student is added to the deed of a property, it could increase the family’s net worth on paper, potentially affecting the student’s eligibility for need-based financial aid.”
There Are Potential Tax Implications
Potentially, one of the biggest implications for most families when adding someone to the deed is going to be the tax liability. A common reason for adding a family member to the deed is to avoid probate. However, depending on the deal, the tax implications can be significant.
“When families add dependents to the deed to avoid probate, this often results in the kids paying significantly more in taxes whenever they sell the property,” said Ashley Morgan, Attorney at Ashley Morgan Law.
“When a parent (or any person) adds someone to a deed without compensation, it is a gift. As a result, the new owner takes over the original owner’s tax basis. This means that when the property is sold, the original purchase price is used as the tax basis, and anything over that is subject to taxation, absent an exemption or improvements.”
Morgan said that if someone inherits a property through a will, trust or similar legal process, the basis for tax purposes is the value on the day of inheritance. There can be a huge difference between the two.
For example, let’s assume a woman bought a house years ago and paid $100,000. As she ages, the woman adds her son to the deed to avoid probate and later dies. The house is now worth $600,000. When the son goes to sell it, he’s subject to capital gains taxes on $500,000 (unless he qualifies for a primary residence exclusion).
Now, let’s assume a woman buys a similar house, and instead of adding the son to the deed, she executes a transfer on death deed. When the Mom dies, the house at death passes to her son with a value of $500,000. If the son then sells the house shortly thereafter for $500,000, also known as the stepped-up basis, he would not have any capital gains since he sold it for the same price from the date of inheritance.
The Bottom Line
Being added to the deed of someone’s home comes with many rewards and responsibilities. Discussing everything in detail with the homeowner ensures you both understand the financial implications before moving forward.
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This article originally appeared on GOBankingRates.com: 4 Things To Know Before You’re Added to a Deed, According to Experts
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
