Estate Planning for Real Estate Owners: Protecting Your Property and Your Children

Sabine Franco
2 days ago
4 min read

Adding a child's name to your property deed seems like a simple way to avoid probate, but it often creates serious tax problems. Estate planning attorney Sabine explains the costly mistakes homeowners make and reveals a better solution that protects your children's inheritance from unnecessary capital gains taxes.

If you own real estate, you've probably thought about adding your child's name to the deed to avoid probate. I understand the impulse. You want to protect what you've built and spare your family unnecessary hassle.

But here's what I need you to know about estate planning for real estate owners: adding a child's name to your property deed rarely works the way you hope it will. In fact, it usually creates serious tax problems for your children.

Let me explain what actually happens and show you a better option.

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The Deed Problem Most Parents Don't See Coming

When you add someone's name to your property deed, you might assume that when you pass away, they'll automatically own the home. Unfortunately, in most states, simply adding a name doesn't work that way.

When two unmarried people own property together, the law typically treats them as "tenants in common." This means each person owns a separate share. If one owner dies, that share doesn't automatically transfer. Instead, it goes through probate anyway.

You can avoid this by making sure the deed says you own the property as "joint tenants with rights of survivorship." But even with the right language, there's a much bigger problem.

The Tax Trap That Costs Families Thousands

Here's the part that catches most people off guard: when you add your child's name to your deed while you're alive, the IRS considers that a gift. And gifts come with serious tax consequences.

The problem involves something called "cost basis," which is what you originally paid for the property. When you gift property to your children during your lifetime, they inherit your cost basis, not the current market value.

A Real Numbers Example

You bought your home in 1985 for $50,000. Today it's worth $350,000. You add your daughter's name to the deed.

After your passing, she sells the house for $350,000. Her cost basis is your original $50,000 purchase price. She'll owe capital gains tax on a $300,000 gain. Depending on her tax bracket, that could mean $45,000 to $90,000 or more in taxes.

The Better Way: Inheriting Through Your Estate

If your daughter inherits the same property through your estate plan instead, she receives a "stepped-up basis." Her cost basis becomes the property's value on the date of your death: $350,000.

If she sells it for $350,000, she owes zero capital gains tax. That's a difference of tens of thousands of dollars.

The Best Estate Planning Solution for Real Estate Owners: A Living Trust

If your goal is to pass real estate to your children while avoiding probate and protecting their inheritance from taxes, a living trust is your best option.

Here's how it works: You create a trust and transfer your property into it. You maintain complete control while you're alive. When you pass away, the property transfers to your children according to the trust instructions, without court involvement.

The Benefits

You keep full control of your property
The property avoids probate
Your children get the stepped-up basis and avoid capital gains tax
The property stays protected from your children's creditors until they inherit
You can change the trust terms anytime

Taking the Next Step

I know estate planning can feel overwhelming, especially when you're navigating property ownership rules and tax laws. But getting this right matters. The decisions you make now will directly impact how much of your wealth actually makes it to your children.

If you own real estate and haven't created an estate plan, or if you've already added a child's name to your deed, it's not too late. An experienced estate planning attorney can review your situation and help you choose the strategy that protects your property and your family's future.

Your home represents years of payments, maintenance, and memories. Make sure your estate plan treats it with the care it deserves.

This article is a service of The Ambitious Legacy Firm. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Legacy Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by using the link below to schedule a call with our Client Services Director, who will be able to guide you on scheduling your Legacy Planning Session.

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