A deed is a legal document that proves ownership of a property. It is beyond ordinary paper since it shows the real owner of a property. However, if you decide to extend the ownership of your property by adding a name to your deed, such action comes with tax consequences.
There are many negative impacts that come with adding a name to a deed. Some of the tax implications of extending your property ownership to another by adding such a name to your deed are that it may trigger gift tax, prompt transfer taxes, and affect tax exemptions, among other consequences.
What is a Deed?
A deed, or property deed, is a legal document that proves ownership of property. It is a document that shows that a property really belongs to the owner. When you add a name to a deed, it means that you are extending the ownership of your property to another person. However, extending your property ownership to another person comes with lots of implications, but we are going to do justice to that in the next section.
Major Consequences of Adding Name to Deed
There are potential consequences to adding a name to the deed. The consequences are:
1. It can be seen as Change in Ownership by Tax Authorities
One of the major consequences of adding a name to a property deed is that local tax authorities can see it as a change in ownership.
The implication is that once it is seen as a change in ownership, it could prompt a reassessment of the property’s worth for tax purposes. And after the reassessment and the tax authorities find out that the value of the property has increased over time, it may lead to an increase in property tax liability.
2. It can affect property tax discounts or exemptions.
Another negative impact of adding a name to a deed is that it could affect property tax exemptions.
As you may have known, some authority offer tax discounts or even exemptions to a certain group of property owners like veterans, disabled individuals, the elderly, etc. So, once you add a name to the deed, it could be seen as a change in ownership, which could strip off the property tax exemptions that were in place. Hence, you will start paying tax on your property.
3. It May Incur Transfer Fee or Taxes
Adding a name to a deed may also incur transfer taxes or fees. This is so because some authorities see adding a name as a change in property ownership. Hence, there is always a transfer fee when a name is added to a deed.
It is important to note that this transfer tax is different from normal property taxes; this transfer fee is only invoked when a name is added to a deed. So, once you add a name to your deed, there is a likelihood that you will be charged a certain fee for that.
4. Ownership Percentages
Just like other consequences mentioned above, adding a name to a deed will lead to sharing ownership of the property with such a person. In most instances, the co-ownership of properties is clearly defined, which may affect property taxes.
If the local tax authority determines the percentage of the co-ownership of such property, chances are that the tax liability will be shared in percentage with the co-ownership ratio.
5. It may Prompt Gift Tax
Another negative reward of adding a name to a deed is that it may prompt a gift tax. Gift tax is a federal fee on transfers of property or money to another person without getting equal value or nothing in return as a gain. This tax is applicable, even if the giver transfers property or money as a gift.
In the US, there is a gift tax exemption. The individual yearly gift tax exemption is about $17,000, while the individual lifetime gift tax exemption is around $12.92 million. The implication is that once you exhaust this tax exemption, you’re liable to pay tax for gift transfers, and adding a name to a deed is taxable under a tax gift.
