While he was still alive (many years ago), my father added my brother and I to the title of his house in Los Altos. My brother and I rented out the property for many years and finally decided to sell it. We got penalized with a heavy capital gains tax that we weren’t expecting. What gives?
– Broke on Burghley Lane
Dear Broke on Burghley Lane:
There are so many different kinds of taxes — it’s hard to keep track. The taxes that I get very concerned about with my clients relate to real property. The “big ones” here are property taxes and capital gains taxes (for profit realized on sale).
Unfortunately, it is really easy to make a costly mistake, and it can often be too late to rewind the clock and fix it. In your situation, when your father added you and your brother as co-owners of the house, you “stepped into his shoes” and inherited the purchase price he paid on the property (otherwise known as basis).
Now, because you are seen as an original owner by the IRS, you owe more in gains tax than if he would have left it through a Will or Trust. Your property taxes could have increased if the proper forms hadn’t been submitted, too.
It is critical that folks get legal advice before adding anybody as a joint owner to a house, including kids! More taxes may be owed due to of “quick fixes” that seem “easy” at the time.