Why Adding Family Members to Your Home Title Can Be a Costly Mistake
Adding family members to your home title for inheritance purposes may seem like a prudent move, but it can actually lead to significant financial drawbacks for your heirs. Here are the two main reasons why this decision could cost your family thousands of dollars.
Loss of First-Time Home Buyer Benefits
First-time home buyer benefits are designed to help new homeowners save money through various programs and incentives. By adding a family member to your home title, you could disqualify them from these valuable benefits when they decide to purchase their own home. Some of the key benefits they might lose include:
- First-Time Home Buyer Tax Credit: Many states offer a tax credit to first-time home buyers, which can significantly reduce their tax liability.
- Down Payment Assistance Programs: There are various state and local programs that provide financial assistance for down payments and closing costs, which can make purchasing a home more affordable.
- Lower Interest Rates: Some mortgage programs designed for first-time buyers offer lower interest rates, which can save them thousands of dollars over the life of the loan.
- Reduced Mortgage Insurance Premiums: First-time buyers may qualify for reduced private mortgage insurance (PMI) rates, decreasing their monthly mortgage payments.
By being added to an existing home title, your family member is considered to have already owned a home, thus losing eligibility for these substantial financial benefits.
Increased Capital Gains Tax
Another significant financial risk involves capital gains tax. When someone inherits a home, the property's value is typically adjusted to its market value on the date of the original owner's death. This "step-up in basis" minimizes the capital gains tax owed if the property is sold. For example, if the home was originally purchased for $200,000 and is worth $500,000 at the time of inheritance, the heir's taxable gain would be calculated based on the market value at the time of death, not the original purchase price.
However, if the family member is already on the title, they do not receive this step-up in basis. Instead, the original purchase price is used to determine the capital gains, which can result in a significantly higher tax liability when the property is sold. This could mean thousands or even tens of thousands of dollars in additional taxes.
Conclusion
In conclusion, adding family members to your home title with the intent of simplifying inheritance can backfire, leading to the loss of first-time home buyer benefits and a substantial increase in capital gains tax.
To protect your heirs and ensure they receive the full benefits available to them, it is crucial to consult with a CPA and estate planner. Spending a few hundred dollars on professional advice can save your family thousands in the long run.
I have a great CPA and estate planner, as well as a financial planner, who can help you navigate these complex decisions. Feel free to reach out for their contact information.
For more information or assistance, please contact me.
Christopher Gibson
NMLS #1910430 | C2 Financial Corp NMLS #135622
Call me: 720-449-6622
Email me: C@ChrisRayGibson.com
