Even though the number of home sales has diminished in recent years, many people are still transferring real estate property for a variety of reasons. The most common type of property transfer is for a parent who transfers the title of a house to one or more children.
We recently discussed the ins and outs of real estate property transfers during our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi.
Reasons to Transfer Ownership of Property
Many reasons exist to transfer property. When refinancing a home, lenders sometimes require that a specific person either be included or removed from the property title.
Other reasons people transfer property include wealth management, to reduce taxes, and asset protection, to eliminate other types of liabilities, such as investors who can only finance a maximum of 10 homes through Fannie Mae, despite the current attractiveness of low-priced property as an investment.
Ownership by married couples allows for financing more properties, but future circumstance, such as divorce, may complicate matters later on, because in community property states like California a spouse has rights to property regardless of whose name is on the title.
When Unmarried Couples Share Ownership of Property
Unmarried couples also frequently buy a house together and then transfer the title to just one of the partners when the personal relationship ends.
In some cases like this, one partner wants to remain in the house and buy out the other partner, but the property is underwater, like so many other homes across the nation. In this type of case, the best option might be to sell the property for whatever is possible and both people split the loss.
Naturally, in personal relationships, promises and agreements are often made about the future between partners, including to sell a share of a property to the other in a worst-case scenario. However, unless a property agreement is written and signed, it is not enforceable.
In short, verbal agreements do not hold-up in court, so a commitment about real estate property has to be in writing for it to be legal.
Placing a property in a living trust helps to avoid the complications of transferring it to a co-owner upon death.
Transferring Property from Parents to Children
As mentioned above, parents frequently transfer ownership of their house to their children for a variety of reasons, including to help obtain refinancing, if they are retired and cannot show sufficient income to justify the loan.
To avoid a large gift tax, children are sometimes added to a real estate title, but if the parents paid a low price for the property long ago, the issue of capital gains tax may need to be considered.
A potential property tax increase should also be considered, if you are transferring property to family members. When you consider and calculate all of the underlying facts and figures, what appears on the surface to be the best method to transfer property to a family member may not actually be the most sound long-term financial strategy.
During our radio show broadcast, we discussed several issues associated with transferring property from parents to children, including:
- Placing property in a trust
- Recovering medical benefits of a parent who dies before using all of them
- Property tax assessments and step-ups related to original purchase price versus current fair market value
- The differences in probate court between community property with the right-of-survivorship, a joint tenancy title, and a tenancy-in-common title
- Spousal petitions
For more about these sub-topics, you can listen to a podcast of this show by streaming or downloading the MP3 audio file in our podcast archive.
Avoid Probate Court Whenever Possible
We always try to avoid probate court at all costs. Recent budgets cuts for municipal services in many cities have slashed the hours of operation for non-essential courtrooms, so it can take longer than ever to process an estate through probate, which is another good reason to create an estate plan.
If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.