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Sharing is caring – at least that’s what came to mind. And for the most part it’s true.
However, when you are thinking of taking the ultimate step in sharing – adding someone to action in your home – it is a good idea to consider the ramifications. It is important to understand that when you add someone to your act, you are giving them that right to the same “set of rights” – control, enjoyment, possession, exclusion, and disposal – that you have as the owner. Before adding a loved one to your act, it is important that you speak with a real estate attorney and your mortgage lender to make sure you understand your rights and to determine if this is the right step for you.
Here are five things to consider before adding someone to your act.
1. You can’t take it back
If you add someone to the deed, all or part of your property will be transferred to that person. Once this is done, you cannot take it back unless the person you added agrees to be removed from the deed. He or she can take out a loan on the property, tear it down, or even sell their share of the property. And in some cases, there is nothing you can do about it.
Even if you transfer only part of your interest in the property, that person will have full control over their share and may possibly force a sale of the property. If you want to refinance or sell your home, you need to get permission from the person you added. This can lead to time-consuming and costly litigation that can bind property for years. Make sure you fully understand the implications and consequences before signing on the dotted line.
2. You need the lender’s permission
The law does not prohibit adding individuals to a deed of a home with an outstanding mortgage. Mortgage lenders are familiar and often work with deed changes and transfers. Most lenders include a loan due on sale clause that allows them to avail of the loan if the deed is transferred or the house is sold. When you “give” someone your home, you have effectively transferred ownership of parts, which could activate the “Due On Sale” clause.
It is imperative that you understand the rules for your particular situation. And you should get permission from your mortgage lender before adding anyone to the deed. (See Also: Why You Should Call Your Mortgage Lender Every Year)
3. Exposure to additional liability
Suppose you decide to add your brother to the act. If he’s not paying taxes and has a tax lien, has trouble with creditors, or is getting a nasty divorce, the IRS, his creditors, or his ex-spouse can claim your home, or at least his portion. In this situation, the owed company may take a lien on your property and try to force a sale to collect the debt or bind the property and prevent you from selling.
Adding a person to your deed of home can also result in income tax liabilities if the residence is sold in the future.
4. IRS gift taxes may apply
If you add someone to your act, the IRS will consider it a gift. That person is subject to the IRS rules on gifts. As of 2018, the allowed IRS gift limit is $ 15,000 per person. Gifts in excess of this amount are subject to gift tax.
The important point here is that you should make sure that you consult a tax attorney or certified public accountant (CPA) before adding anyone to your deed to make sure you understand all of the implications and don’t run into any surprises later. Your good intentions can be costly if not accompanied by careful scrutiny. (See Also: 4 Things You Need To Know About The Gift Tax)
5. It can get complicated
There are so many hidden risks and pitfalls in adding someone to the act. Remember that you will become a co-owner rather than the exclusive owner. This change could affect your eligibility to sell or refinance. And for older homeowners near retirement age, asset transfers can affect Medicaid eligibility.
Another thing to consider is that adding someone to the act does not hold them responsible for the debt. Unless the original loan agreement is changed, you remain solely responsible for the repayment and the other person has property rights.
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