How Transferring Title to Children Can Cost Tens of Thousands of Dollars in Tax Consequences

“Hi Robert,
My parents would like to transfer ownership of their home to either me or one of my siblings.  They’ve asked me to look into this.  I’m not sure where to start.  The home has been paid in full.  Can you point me in the right direction?”

Ricardo – San Jose, CA.

Ricardo, in regards to transferring ownership of your parent’s home to one of you, it is relatively easy to do and requires some simple documents from a title company, and depending on the city and county, may also require property transfer taxes. But that is the easy part.

This is a transaction that I think you should run by a CPA, an attorney and title company to possibly obtain title insurance as there are sometimes lien issues and other issues that may cloud the title, meaning the title of the property may not be completely free and clear even if there are no loans on it.

Something else that is even more important is the fact that transferring title and ownership of a property from a parent to a son or daughter can have tax consequences and really should be discussed with a qualified professional to determine what the best solution is.

For example, if your parents bought the home for $100,000 and then remodeled and upgraded the property at another cost of $50,000, the “cost basis” would be $150,000. Let’s say that the property is worth $300,000 today, if that was the case, and if you were to have the property transferred to you and you were to later sell the home at the $300,000, then you could be taxed on the difference of your cost basis and the sales price, being $150,000. At a capital gains rate of 15%, you could be looking at a $22,500 tax bill.

However, if you were to inherit the property at your parent’s passing, then the current value of the home would be the “stepped-up basis” of the property and if you were to sell it at that time for the value of which it was inherited, then you would not be paying any capital gains taxes.

Of course if you were to move into the home now or when you inherit the home, if you live in the property for at least two out of five years when you do sell, you would have the $250,000 capital gains exemption and if you and your wife lived in the home, you would have a $500,000 exemption as it is a $250,000 exemption for every person who lives in the home and qualifies for this tax break. The key being each person on title or a spouse having lived in the home for two out of the last five years when the property sells.

As you can see, there are some things to consider before you go ahead and just transfer title from one person to another. You should consider either talking to a CPA, and attorney or both who specialize in this type of transaction. One good hour of solid advice will be better that tens of thousands of dollars that you could end up owing to the IRS if you make the wrong move.