28 Mar Deed transfer and property taxes

Q. I can only deduct half my property taxes because my sister’s name is on my house deed. She doesn’t live here or pay the property taxes. She will eventually inherit my house – we did this to reduce the inheritance tax. What would happen if I instead buy her out for $1?
— Half homeowner

A. There are lots of consequences to whatever changes you make to your deed.

First, you’re correct that you can only deduct half the property taxes if you technically own half the house.

Here’s what the law says:

“If you owned your principal residence with someone who was not your spouse/civil union partner, only the amount of property taxes that reflects your percentage of ownership in the property, as shown on the deed of record, can be used when calculating the property tax deduction or credit.”

Now, if you were the sole owner, you could deduct the full property tax – within the limits of the law.

If your sister sold her half of the house to you, this would be a transfer of interest for far below fair market value, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“Since it is not an arm’s length transaction, selling at below fair market value is not recommended as the transaction would be deemed as a disguised gift,” Karu said. “If the intent is to have it 100 percent owned by the resident of the property, the sister should gift her half.”

Karu said there should not be any tax due on the gift.

He offered this hypothetical: Let’s say the home was worth $500,000, each sibling has a 50 percent ownership, or $250,000. The sister would gift her share using her $15,000 annual per person exclusion and apply the remaining $235,000 to her lifetime exclusion. A gift tax return is required as well as an appraisal on the property to substantiate the fair market value, Karu said.

If your sister later inherits the home, she would get a step-up in basis, and this would potentially avoid any capital gain when she sells the home upon your death.

Also remember with gifting, Medicaid could look back and take issue with the transfer. That’s why we recommend you work with someone who knows your situation before you make a move.

On the inheritance tax issue, for siblings – Class C beneficiaries – the first $25,000 is exempt from inheritance tax. Over that amount, the rates rise until they reach 16 percent for assets over $1.7 million.

You may want to speak to an estate planning attorney to see if the property tax savings during your lifetime are substantially different from the inheritance tax liability your sister would face.

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This story was originally published in March 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.