At least, that is what we have been taught. It’s mostly true.
If you are considering the ultimate in sharing, adding someone to your deed of ownership on your house, it is a good idea that you consider the possible consequences. When you add someone to the deed of your home, you give them all of the rights that you enjoy as a homeowner, including control, enjoyment and possession. It’s vital that you consult with an estate lawyer and your mortgage lender before adding someone to your deed to make sure you fully understand your rights and determine whether this is the best move for you.
Consider these five factors before you add someone to your will.
1. You cannot take anything back
You can transfer all or part of your ownership to someone else by adding them to the deed. You can’t remove someone from a deed once it has been added unless they consent. He or she may take out a mortgage on the property, demolish it, or sell their share. In some cases, you have no choice.
If you only transfer a part of your ownership interest, the person who receives it will be in full control and could force the sale of the home. You must obtain permission from anyone you have added to your property if you wish to sell or refinance it. It can result in expensive and time-consuming legal battles, which can stall the property for many years. Be sure to fully understand all the implications and possible consequences before signing on the dotted lines.
2. You must obtain permission from your lender
Law does not prohibit adding someone to the deed of a house with a mortgage. Mortgage lenders have experience with deed transfers and changes. The majority of lenders have a “due-on sale clause” that allows them to cancel the loan in case the deed or home is sold. You’ve effectively given someone a part of your home when you “deed” it to them. This could trigger the “due on sale” clause.
You must understand the rules that apply to your situation. You should also ask your mortgage lender for permission before adding anyone to the deed. (See also Why you should call your mortgage lender every year).
3. Additional liability
Say you want to include your brother in the deed. The IRS, his creditors or his ex-spouse could claim your home or at least his share if he does not pay his taxes, incurs a lien or has creditor problems. The entity that owes you money can put a lien on the home and try to sell it to recover the debt, or even tie up your property to prevent you from selling.
Addition of a person to your deed can result in income tax obligations when you sell the home.
4. Gift taxes are taxable by the IRS
The IRS considers adding someone to your will as a gift. This person is now subject to IRS regulations regarding gifts. The limit for IRS gifts is $15,00 per person annually as of 2018. Gifts above this amount are subjected to gift tax.
It is important to remember that you need to consult with a CPA or a Tax Attorney before adding someone to your will. This way, you can ensure that you fully understand the implications of the addition and avoid any unpleasant surprises. If you don’t do your due diligence, even the best intentions can cost you. (See also Four Things You Should Know About Gift Tax).
5. The situation can become complicated
Addition of a person to the deed can have many risks and pitfalls. You become a co-owner, not the exclusive owner. This can affect your ability to refinance or sell. Transferring assets to older homeowners who are nearing retirement can affect Medicaid eligibility.
A second thing to remember is that adding a person to a deed doesn’t make them liable for the debt. You are responsible for repayment unless the original loan agreement has been modified. The other person still owns the property.
