Joint Tenancy on Parents’ Home

Parent Cafe
1

<p>This is kind of long, but I know you guys often have experience and thing of angles that I don’t. So here goes. I am wondering if anyone has any personal or professional experience with this to help me think of more questions to ask.</p>

<p>My parents have presented my brother and me with a decision that they want us to make by the end of 2011. The state they live in has a law that limits the % that property taxes can rise each year. Thus the property taxes on their home only go up a small % every year. However, in the past, when one of the homeowners died (or the house was sold), the property was re-assessed and a much higher property tax rate could be applied. A recent court decision said that the death of a homeowner (when the home is held in joint tenancy with someone else) should not mean that the joint tenant loses that proteciont of the cap on the tax increases. </p>

<p>They have asked if one or both of us want to be placed in joint tenancy on their home (also their cabin, but for other reasons that one is a no-brainer for this decision). Their logic is that if one or both of us (eek, not living with my brother, but I suppose we could own it as a rental property together) want to own the home after their death, then the lower property tax rate would be preserved. In the email my dad sent to me, he gave a scenario where my brother wants their house (he lives in the same town they do, I live several hundred miles away), so he gets put on as JT, and I would be paid 50% of the appraised value of the house from the estate. Brother gets the house, I get cash from the estate for ½ the value. </p>

<p>As far as I know, we are the sole heirs, although it wouldn’t surprise me if they make a small, fixed amount monetary contribution to their church in their will as well.</p>

<p>So I definitely do not want their house. But I think it would be great if my brother moved in, but of course this decision is up to him. When first thinking about it, I figured that the scenario my dad laid out (brother becomes JT, will is changed so I get 50% of appraised value at time of death from the estate) sounded pretty good to me. </p>

<p>Then my brother called today. Although he is quite sure he would like to have the house, his wife is in terrible state (not sleeping at night) trying to figure it out. She owned the house they live in from before they were married (she has probably lived in it for 30 years now). Although my parents house is nicer (worth more, much more elegant and spacious with a beautiful yard, a very modern kitchen, extremely well maintained, well configured for pets), she is very attached to her current house. My brother prefers my parents’ house, except that his current house is in town so he can walk and bike places. But that is not a big factor to him, as the difference between “in town” and the neighborhood my parents live in is only 10 minutes of driving. And he is self employed, so doesn’t even commute. So he wants to get his wife to move… but figures he has to “ease her into” the decision. He figures that once my parents die, then they could move to my parent’s house for 30-60 days so she could used to it, then decide whether to sell or keep it. They have one kid who started college this year (at the state university) who might very well move back to their town after college to live and work. Also… both my brother and his wife spend a lot of time at my parent home, it is less than 15 minutes from their house. They have been married for 20 years, so this is not an unfamiliar house to her. </p>

<p>The rub is that he wants me to sign on in joint tenancy with him now so he doesn’t get stuck with the expenses/hassle of selling by himself if his wife ultimately doesn’t want to move. It can take a long time to sell in their area even in good times. He got kind of crabby with me on the phone today when I said I wasn’t sure I wanted to do that… so I am trying to come up with a list of questions to discuss with him/my dad/my dad’s attorney (and maybe my own attorney, since I live in a different state). </p>

<p>I can add one more scenario on my own to this. That is my parents (or one if the other one dies) deciding to move out of the house at some point before they die. They have lived there for a long time (over 45 years), but something like Alzheimers or the death of the other spouse could cause them to do this. In that case, my brother may want to purchase it at that time. Again, the joint tenancy would make his taxes lower. </p>

<p>So far the things I am worrying about are:</p>

<ul>
<li><p>Once I sign on as a JT, one quarter of the value of my parent’s house becomes my asset. Thus showing up on the FASFA. Now most years with D1 (college senior), we have not filled out the FAFSA, EFC is too high. But if I had a serious health problem (had a scare earlier this year, nothing came of it) or couldn’t find clients for my business in an economic downturn, I want to have the option. We did have one year for D1 when we did do the FAFSA due to something along those lines. So I wouldn’t really want to have that extra asset in my name.</p></li>
<li><p>If brother and I own the house outright when parents die, I believe I would have a capital gains tax implication because it would be a second home for me (and for my brother). Whether we sold it together and split the proceeds, or whether he bought me out of my half after deciding to live there, either way I believe I would have to pay capital gains tax on that. If the house stays in the estate, I would owe no tax on my half of the money (not a big enough estate to trigger an inheritance tax at the federal level or the state where I live). </p></li>
<li><p>If my parents have to/choose to sell before they die and my brother doesn’t buy it, we would need to figure out how to handle that. Assume they would take us off JT at that time, otherwise again ¼ of the proceeds would belong to me (with capital gains tax), and I couldn’t just give it back to them without gift tax implications.</p></li>
</ul>

<p>Anybody have any thoughts on more implications I am not thinking about? I think my dad wants us to decide soon because I will be in their town in late December, and we could do the paperwork while I am there. Obviously I want to discuss with my dad’s attorney and my own, but I am just trying to figure out if I am asking all the right questions (like, nobody in that group was going to think of the FAFSA, but you all surely would :slight_smile: ).</p>

2

<p>I can only speak to college FA. I can testify from personal experience that you DEFINITELY do not want to own a share in a property that you cannot sell or take out a loan against. The fact that we have such an asset meant that a number of schools assumed we could pay $20K per year on an income of under $30K at the time! A few schools understood–and apparently believed–that we simply could not access the paper value of this asset to pay for college. (Thank doG my S preferred one of the schools in question, or I don’t know what we would have done…)</p>

3

<p>I don’t know the local laws in the state where the property is, but in Cal. if you inherit a house, the property tax is going to stay the same.</p>

<p>If you agree to the JT transfer, you will have to consider the gift tax This year, nevermind the tax consequences in the future years. </p>

<p>Also important to consider is the complications on 3 ownerships, the merriage, the separation etc. You are heading to a lot of headaches if some thing happens to you or your brother. You have to consider Minority JT ownership on a property that is subject to death, divoice and separation(in reference to ALL parties). It would be much simpler if it remains in one ownership and be included in the Estate when your parents passed away. </p>

<p>As far as FAFSA concerned, I think you should be more concerned in CSS profile than FAFSA as it mostly deal with the income, while CSS Profile deals with all assets as well. I am not an expert in that and the subject has beed discussed to death in the Financial Aid section.</p>

<p>In short, you need to sit down with all parties and an accountant or tax lawyer to sort those out. No need to be emotional, it is almost a business decision.</p>

4

<p>Artloverplus, this property is not in California. The laws are different in that state (as I described in my original post). My dad is pretty savvy on this kind of stuff, and does a lot of estate planning (although the estate is not big enough for an inheritance tax, it is not inconsequential).</p>

<p>My brother thinks there is no gift tax implicaton on adding us as Joint Tenants. But I do have that on my list of questions for the attorneys.</p>

<p>Yes, you are right, it actually is a CCS impact. Which we will be filling out, as D2’s college choices are almost all top tier or 2nd tier LACs.</p>

<p>I agree, it is mostly a business decision for me. But my brother is stuck with an emotional issue as well (and his wife, while I do love her, is not always the most logical person – she is very much driven by emotion). And he thinks if I sign on with him, he can avoid that emotional decision until later. </p>

<p>One more factor is that the other parties (my parents & my brother) are rabidly anti-government. I almost think they would rather lose some money/accept complexity and risk vs. paying a dime more in taxes to anyone. So we will see…</p>

<p>Just looking at Joint Tenancy info online, I can that if any of the joint tenants file for bankruptcy, the house could be considered an asset of that person. Risk of that is extremely low for any of us, although with health care/health insurance in it’s current state, I know that is the one factor that could unexpectedly put any of us under Medicare age there… So that is another risk factor.</p>

5

<p>Had a like situation with my mom.
The home is in property tax deferral that is now 50% of “market value” according to county. House needs wiring, plumbing replacement and kitchen and bath remodels that would take the remaining value. Local market is very slow and depressed. Ownership 50 years.</p>

<p>A coastal 2nd home, 40 yrs ownership, taxes up to date. Very highly appreciated although 40% less than peak value. Very slow market but can be sold for a substantial profit. - if we receive as a gift siblings will assume original basis. If we receive as a inheritance value is at current, appraised.</p>

<p>Reference: “Saving the family cottage”. Hollander, Hollander, & Fry. NOLO Press.</p>

6

<p>I believe their house is in quite good shape (could use new windows, but other than that it is very sound and well cared for). No mortgage. And it is their primary home we are talking about, not a second home. So maybe not the same situation, LP.</p>

7

<p>Ask the attorney about using a living trust. I don’t know about the tax ramifications in your state, as each is detailed differently, but perhaps a trust could address the property tax implications.</p>

<p>I understand the motivation, my parents sold their home and carried the paper in order to move near family when illness struck; when I helped them foreclose they no longer had that prop 13 CA property tax protection so taxes are much higher :(</p>

<p>Just based on what you have said, I would NOT want to go on with your DB and his wife (community property). It’s all rather complicated and would be moreso if life changes and life does change.</p>

<p>I have a sibling who bought a property with a disabled sib, to allow the disabled one to use an inheritance wisely, now more than a decade later, helper sibling is tired of making monthly mortgage payments on a real estate ‘investment’ where the partner lives rent free. Helper sibling would rather be helping her kids buy a house than housing a sister, even if all the money spent is returned someday when the property is sold. It has been a cause of much angst and frustration for about 5 years and the down market does not help.</p>

8

<p>IP. Ok, I will ONLY address this on the federal level. I am sure you have a gift tax issue, but don’t listen to me, ask a local tax attorney who will know all the tax issues. BTW, gift tax is not paid by the receipiant, it is paid by the one who gives the money, so there is no tax issues with you or your brother, it is your parents who have to pay.</p>

<p>And, never say never, your parents may live for another 20 years, things may and will happen to all parties. As you have mentioned already, a serious illness may undermine the financial arrangements today.</p>

<p>Also, when you inherit the property, local tax may not be the issue as you may sell the home to split the money. If one of you wants to buy out, that is another story and the property tax treatment may be indifferent from what you have done today.</p>

9

<p>Well, I am definitely NOT inclined to do this, but can see that I will face pressure from DB to do it. Just lining up my reasons so hopefully he won’t be too unhappy with me…</p>

10

<p>From what I can tell through more poking around on the internet, it appears that the gift tax issue depends on local laws regarding whether the added joint tenant has the right under state law to sever his interest in the joint tenancy and receive half of the property. If that right exists, it is a gift. But this is one I will leave to the attorneys to answer.</p>

11

<p>When will your parents pass away; might they ever need the cash that selling the home might bring them; what would happen if you and your brother had a business or personal issue that changed any of your current plans? These are all possibilities that you have no idea about. It seems to me that if any of these possible and serious downsides happened, you might lose a lot more money trying to deal with the house that you would save merely to avoid or minimize taxes. </p>

<p>I realize you don’t want to upset your brother, but you’re both facing the same uncertainties, not just you. At the same time, he will still have the opportunity to buy out your half of the house in the future.</p>

12

<p>Hayden, I think they are pretty well set for cash. They are in their mid-80s – Dad’s health is better than Mom’s, but they are both doing quite well. But they might want to sell if they had to move to an assisted living facility in several years, or if my dad dies first (I think my mom would like to move to a smaller place in that case). But in that case, they will might want it to go to my brother (with some provision so I get 50% of the value at that time from their estate or something later on, they are very fair that way), and he might want it at that time. Gah… so complicated.</p>

13

<p>Your brother might want the house. You know for certain that you won’t. This is a no-brainer. Your answer to everyone is, “Thanks, but no.”</p>

<p>If your brother wants to twist himself into a pretzel for the sake of maybe saving some property tax down the line, that’s his business. Personally, I’d guess that someone in your state or local govt. will deal an effective blow to this loop-hole and DB won’t see the savings he currently is imagining.</p>

14

<p>I think you really must talk this over with somebody who really knows the tax laws. Here’s why I think this may not be a great idea.</p>

<p>To expand a little on what LongPrime said (post #5), when you sell this house, you’ll owe capital gains tax on any increase in its value during the time you’ve owned it. If you have owned and occupied the house for two out of the previous five years before the sale, you can exclude up to $250,000 in profit ($500,000 for a married couple, filing jointly) from federal capital gains tax. But if you haven’t owned the house for at least two years, and if you haven’t lived in it for two of the preceding five years, you can’t. (In some cases, but not every case, you can prorate the exemption.)</p>

<p>The amount of your profit is the selling price of the house (minus any costs of the sale, such as commissions and taxes), minus your basis. The basis is the original purchase price of the house, plus the costs of any improvements (such as adding a deck, finishing the basement, remodeling kitchens or bathrooms). Unless you inherit the house. If you inherit the house, you receive a “stepped-up basis”; your basis for selling the house is the market value of the house on the day you inherit it. On the other hand, if your parents add you to the title of their house as joint tenants, then you take over their basis. If they’ve owned this house for years (if, for example, we’re talking about the house you grew up in), it’s entirely possible that their basis is very low and you could owe capital gains on a huge profit, even after the recent decline in the market.</p>

<p>Absent the considerations of gift tax and property taxes, it is clearly better to inherit real property than to receive it as a gift. I think this is a case where it makes a lot of sense to pay some money and get the advice of a local tax professional who knows the relevant federal, state and local laws.</p>

15

<p>The risk of owning a property with a sibling (and his spouse) and the possible headache over disagreements in the maintenance and ultimate sale of the house would be a nightmare in my opinion. Also of interest/issue imo is what would happen if bro becomes joint tenant and dies before parents - does SIL take over interest in house and now can tell parents what to do? I hate to say it, but no one ever knows who will pass first - accidents, illness etc.</p>

<p>Good luck.</p>

16

<p>Some of your financial questions might be answered immediately once you have the right numbers available to you; the current property tax, the property tax that would be assessed on the property if inherited, the estate tax percent in your state (if there is one). I think Sikorsky is correct in that you’ll find that it’s far better to inherit the house at the stepped-up basis than to pay capital gains taxes on the gain.</p>

<p>The capital gains tax rate is currently 15% but might be increased in coming years. The Federal estate tax exemption is $5million in 2011 and 2012 and drops to $1million in 2013.</p>

<p>You say that one scenario would have you collect 50% of the appraised value of the house from the estate. One thing I didn’t see addressed is whether it will be a hardship for your brother to buy you out, or if there’s enough cash in the rest of the estate that this won’t be an issue. You don’t want to be in the position of hounding your brother to pay you your half of the house. </p>

<p>Also, are you sure that the lower property tax rate would be preserved if you turn this house into a rental?</p>

17

<p>Sikorsky posted what I was going to point out - that whoever is added to the joint tenancy will inherit your parents’ basis in the house, causing a much larger capital gain when the house is sold. I would much rather inherit the house so that my basis was the value of the house on the date of death.</p>

<p>And vballmom pointed out that the lower property tax rate may not be preserved if you rent out the house after your parents’ death. Here in Florida where I live, we have a similar property tax benefit for homesteads. Property assessments may not rise more than 3% per year on your homesteaded property. However, when the house is sold, the house will be reassessed to its true market value and taxes will be assessed based on that amount. But this can also happen if the house is rented out since the owner would no longer have a homestead exemption on the house. I have to renew my homestead exemption every year. If I buy a new home and keep the old one, too, I would apply for homestead exemption on my new home and lose it on the old one (where taxes would more than double).</p>

18

<p>I am 99.9% certain there will be enough cash in the estate to buy me out of the house.</p>

<p>If my brother inherits the house and moves into it, he will sell his old house and live in my parents’ house as a primary residence. The value of the house now is appraised at about $180,000 (nice house, but smallish town with bad economy – it would sell for a lot more in my neighborhood!). So I don’t think he is at too much risk of a big capital gains hit because he would make it his primary residence before selling it. </p>

<p>However, if he signed on as JT and then he decided to sell it after they die (not move in), I believe he would take a capital gains hit. </p>

<p>Really, I have no intention of owning that house as a rental with my brother (even though I said that in my OP). We have been co-executors for our other sibling. He died 6 years ago and left a HUGE mess of an estate that is still open, including 14 rental properties. I have had plenty of experience being “co-landlords” with my remaining sibling, and definitely do not want to continue the experience any longer than I have to. But also, we do know what kind of stuff can happen to complicate these things.</p>

<p>Vballmom, you are correct that we would not hit the estate tax at its current level, but that would be a consideration if it drops to $1 million. Big if, of course. No telling what will happen.</p>

19

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<p>Is that a recent appraisal of its market value, or its valuation for taxes? They can be very different.</p>

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<p>If he inherits the house, he’ll be fine because of the stepped-up basis. If he inherits the house and sell it immediately, how much can it appreciate? He’d owe capital gains tax only on any appreciation between the date it becomes his and the date he sells it. If he inherits it and lives in it for two years or more, he wouldn’t owe any capital gains tax until the house has appreciated to $250,000 above its value on the day he took ownership.</p>

<p>But if your parents add him as a joint tenant, then his basis won’t step up. If he owns and occupies the house for two years, however, then he can exclude capital gains as described before. But if they add him and you to the title, *you *could have some tax exposure for capital gain on your share of the house unless you move into the house for two years yourself.</p>

<p>It should be noted that even if you and your brother are added to the title, should your parents die, you would presumably still inherit their share of the house, and your basis on that share of the house’s value should be stepped up, if you inherit it. It’s only the ownership share you had before you inherited that wouldn’t get a new basis.</p>

20

<p>Yes, I know all that (those years of experience as a co-executor taught me quite a bit about basis changes, etc.). I misspoke in the second quote, I meant if he takes the house over at the joint tenant when they die (not “inherits”). The more I am thinking about this and learnig today, the less likely I am to sign on as JT no matter how much DB wants me to.</p>

<p>I believe that value is a recent appraisal.</p>

<p>I just emailed a list of questions to my dad, and asked if we could set up a conference call with DB, Dad, and Dad’s estate attorney later this week. I feel like I have a pretty good set of questions now. Thanks to everyone for helping think this through!</p>