The old adage “sharing is caring” is often emphasized, and while it generally holds true, the implications of sharing property ownership are far more complex.
Before making the significant decision to add someone to your home’s deed, it’s essential to evaluate the potential ramifications. Doing so means granting that individual the same “bundle of rights” — which includes control, enjoyment, possession, exclusion, and disposition — that you possess as the current homeowner. Consulting with an estate attorney and your mortgage lender is crucial to fully comprehend your rights and to ascertain whether this decision aligns with your best interests.
Consider these five important factors prior to adding someone to your deed.
1. Irrevocable actions
Once you add a person to the deed, you’re transferring some or all of your ownership to them. This action cannot be reversed without their consent to remove themselves from the deed. The new co-owner may take out loans against the property, alter it in any way they choose, or even sell their portion without your approval. Even partial transfers grant that person considerable power, which could potentially complicate any future refinancing or sale of your home, leading to expensive and prolonged legal disputes. Be sure to be fully aware of the consequences before you proceed.
2. Lender’s consent is necessary
While there are no legal restrictions against adding individuals to a deed when a mortgage is involved, it is crucial to recognize that most lenders include what’s known as a “due-on-sale clause” in their agreements. This clause allows them to demand full repayment if there is a change in deed ownership or if the property is sold. Therefore, you should seek your mortgage lender’s approval prior to making any changes to the deed. (See also: Annual Check-ins with Your Mortgage Lender)
3. Increased liability risks
For example, if you add your sibling to the deed and they run into financial difficulties, your home could be at risk. If they fail to pay their taxes or encounter creditor issues, claims can be made against your property, or at least their share of it. This could also mean that any liens placed on the property might restrict your ability to sell, resulting in potential legal complications that are burdensome.
Additionally, involving another person may trigger income tax implications when the property is eventually sold.
4. Potential gift tax implications
From the IRS’s perspective, adding someone to your deed is considered a gift. This means that the individual may be subject to IRS regulations regarding gifts. As of 2018, gifts over $15,000 per year are subject to taxation.
To avoid unexpected costs down the line, it’s wise to consult with a tax attorney or a Certified Public Accountant (CPA) before altering any deed. Well-intentioned gifts can lead to financial liabilities if not properly managed. (See also: Key Information About Gift Tax)
5. The complexities of co-ownership
There are numerous unforeseen challenges associated with sharing deed ownership. A transition to joint ownership means you are no longer the sole proprietor, which can complicate your ability to sell or refinance. For older homeowners, this can also negatively impact Medicaid eligibility when considering asset transfer.
Moreover, simply adding someone to the deed does not make them accountable for loan repayment; you still hold that obligation unless the original loan terms are altered, leaving you with ownership responsibilities while sharing authority.
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