Pitfalls of Including Children on Title to California Real Estate

In California, adding your children to the title of your real estate might seem like a thoughtful gesture, potentially simplifying the transfer of property down the road. However, this seemingly simple decision can be fraught with complications and unintended consequences. This blog explores the key pitfalls associated with including children on the title of your real estate.

Tax Implications

One of the most significant challenges of adding your children to the title is the potential tax implications. When you add anyone to your property title, it could trigger a reassessment of your property taxes. In California, property tax rates are typically based on the purchase price under Proposition 13, and a title change can lead to a reassessment at current market value, potentially increasing property taxes substantially.

Gift Taxes

Another tax issue to consider is the potential for gift taxes. By adding your child to the title, the IRS may consider this a gift, which could require you to file a gift tax return. Although you might be under the annual gift tax exclusion amount, it is still crucial to understand how this may impact your overall estate strategy.

Capital Gains Tax Concerns

Capital gains tax is a critical aspect to consider as well. If your home appreciates in value, adding your children to the title could result in a higher capital gains tax if the property is later sold. This is because your child’s cost basis would be the original purchase price, not the value of the property at the time of transfer.

Loss of Control

In addition to tax matters, you should be aware that transferring title means giving up partial control of your property. Your children, once added to the title, will legally be co-owners. This status means they must agree to future sales or refinancing efforts, which could be problematic if relationships or circumstances change.

Potential for Financial and Legal Complications

Including children on your property's title could also expose the property to their personal financial liabilities. If your child incurs debt or faces legal challenges, creditors might have a claim on their portion of the property. This adds a level of risk that could potentially impact you, especially if there are liens or legal judgments against your child.

While the intention behind adding children to a real estate title can be beneficial, it’s important to carefully weigh these aspects. Assessing the tax liabilities, considering legal responsibilities, and understanding the potential for unforeseen complications are essential steps. For parents intending to pass on property, alternatives like trusts may offer a more controlled way to manage and eventually transfer real estate assets.

I Already Added a Child to Title, What do I Do Now?

You should seek advice from a qualified California attorney knowledgeable in the areas of law discussed above. Removing a child from title could generate adverse property tax consequences. We often see individuals attempt to cure title issues themselves by signing a deed and having it notarized or using a title company to prepare a new deed to change the ownership of the property. However, the advice of an attorney or other tax professional will provide you the guidance required to evaluate the potential pitfalls of changing title.

A scenario we commonly see, which is slightly different than the examples discussed above, involves parents who want to help their child purchase a residence. For financing purposes, a parent may be willing to co-sign a loan and in turn, the lender requires parent to go on title to the property with the child. Years later, parents wish to come off title, a refinance opportunity could arise for the child, or the child wishes to sell the property. In any event, removing parent from title becomes desirable. However, this could lead to adverse property tax or capital gains tax consequences. The savvy planning family will consult with their advisors  prior to closing escrow  on the original transaction in order to contemplate the most strategically beneficial structure of ownership going forward. 

At Rosen Trust Law we are experts on these types of planning matters. Never hesitate to reach out to us if you find yourself in a scenario similar to those described above, and we can guide you towards a successful outcome.