Expats: Thinking of putting your house in the name of your adult child? Know the risks related to taxation

Dubai: Many people think it’s a good idea to put their child’s name on the deed, especially if one of the parents is deceased.

(What is a deed? A deed is a formal document that defines how property is owned, transferred, and inherited.)

So what is the difference between a house “title” and a “deed”?

To put it simply, the biggest difference between a “title” and a “deed” is the physical component. A “deed” is an official written document declaring a person’s legal ownership of property, while a “title” refers to the concept of property rights. Here is one way to understand the difference.

Although you can own a physical copy of a book, you cannot hold a book title in your hand. In this way, a book title and a property title are identical: neither is a physical object, but both are concepts. A deed, on the other hand, can (and should) be in your physical possession after you purchase the property.

Is it wise to put your child’s name on your deed?

“While putting your child’s name on your deed is often seen as an inexpensive estate planning technique to ensure your son or daughter receives your home in the future, it may cost you more than you would expect. think so,” said Masher Suleiman, a real estate and financial agent. planning associate based in the UAE.

“In most parts of the world, adding a child to your home deed can create complications and not achieve your long-term goals. That’s why alternative methods of owning real estate with your children should be explored.However, one need not worry about this risk in the UAE.

The risk factor that Suleiman cites, among several other experts, is something called “capital gains tax.”

Key risk factor: capital gains tax

The risk factor that Suleiman cites, among several other experts, is something called “capital gains tax.” However, before understanding what “capital gains tax” is, know if it is applicable in your country of residence. While it applies to most countries in the world, it does not apply to a few countries.

There is no capital gains tax imposed in the UAE. While capital gains are taxed as part of regular business profits, the UAE does not impose net worth tax or inheritance and gift taxes.

Other than the United Arab Emirates, countries that do not impose capital gains tax include Bahrain, Barbados, Belize, Cayman Islands, Isle of Man, Jamaica, New Zealand, Sri Lanka and Singapore. Of most other countries that levy capital gains tax, Greece and Hungary have the lowest rates, at 15%.

What are capital gains taxes?

However, in almost all other countries, this is a risk you should be aware of. Now, let’s understand what “Capital Gains Tax” is. A capital gain is the difference between your basis (buy price) and the amount you get when you sell an asset (sell price).

For example, if you bought a house for $100,000 (367,310 Dh) and sold the same house a few years later for $500,000 (1.8 million Dh), you will have to pay tax on your gain of 400,000 $ (1.5 million Dh) – with a few exceptions.

If you add your child to the title to your home while he or she is alive, he or she receives your base (purchase price) in the home. If your child sells the house after you die, they will likely have to pay capital gains tax on the difference between your purchase price and the sale price. See illustration below.

Although putting your child’s name on your deed is often seen as an inexpensive estate planning technique to ensure that your son or daughter receives your home in the future, it may cost you more than you don’t think so.

-Masher Suleiman

Figure 1: Suppose you bought your house in 1980 for $100,000 (367,310 Dh). In 2010, you add your child to the title deed when the house is worth $500,000 (1.8 million Dh). When you added your child to your deed, you technically donated half the value of the property ($250,000 or 918,275 Dh).

Your child also receives half of your basic cost ($50,000 or 183,655 Dh). So if you die and your child sells the house for $500,000 (1.8 million Dh), then your child would be liable for capital gains tax on his profit of $200,000 (734,620 Dh) .

“In most countries around the world, the current rate of capital gain is 15% for most people, but can be as high as 20%,” said Indian tax consultant Brijesh Meti. This means that your child may have a tax bill of $30,000 (110,193 Dh) to $40,000 (146,924 Dh) on the sale of his half of the house.

“Conversely, your half of the house is probably not subject to capital gains tax, as your children will receive what is widely known as a ‘tax increase’ basis at your passing,” Meti added.

This means that their cost basis (purchase price) for your half of the house worth $250,000 (918,275 Dh) is “increased” from the original purchase price of $50,000 (183,655 Dh). ) to $250,000 (918,275 Dh), thus eliminating the capital gain on the sale of your share of the house, upon your death.

As illustrated above, your child is liable to pay capital gains tax of $30,000 (Dh110,193) to $40,000 (Dh146,924) for the share you transferred to him. There is probably no tax on the share they receive from you after your death.

So why not transfer the whole house to your child when you die? What if, instead of adding your child’s name to your deed, you used a “revocable life trust”?

Home Buy

Why not transfer the whole house to your child when you die? What if, instead of adding your child’s name to your deed, you used a “revocable life trust”?

What is a “revocable life trust”?

“A “revocable living trust” is a popular, risk-free estate planning tool that you can use to determine who will get your property when you die. Most living trusts are “revocable,” meaning you can change them as your circumstances or wishes change,” Suleiman explained.

“Revocable living trusts are ‘living’ because you create them during your lifetime. Lawyers sometimes call this “inter vivos”. Here’s another illustration (using the same assumptions as above) considering you used a “revocable living trust” instead of transferring the whole house to your child.

Figure 2: Suppose you bought your house in 1980 for $100,000 (367,310 Dh). In 2010, you set up a trust that gives your home to your child when you die. Since the house passes on your death, your child benefits from a tax increase on the total value of the house.

This means that if he sells the house after you die, his base cost (purchase price) increases from the original purchase price of $100,000 (Dh367,310) to $500,000 (Dh1.8 million). ) (i.e. the value of the house when you die), thus eliminating the capital gain on the sale of your share of the house.

By not putting your son or daughter on your deed, they can enjoy a full cost increase and save $30,000 (Dh110,193) to $40,000 (Dh146,924) in capital gains tax . They cannot receive these savings if you put them on your deed while you are alive.

Plus, using a trust or other device to pass your home on to our heirs is as easy as putting their name on the deed, without the risks described above. This is one of the many reasons why a living trust can be the most important document in your estate plan.

A “revocable living trust” is a popular, risk-free estate planning tool you can use to determine who will get your property when you die.

-Masher Suleiman

Verdict: Adding an adult child’s name to the house title isn’t the best solution

Many parents, when planning their estate, add the name of an adult child to the title of their home, bank account or other assets. This may not be the best approach to estate planning and it can have unintended consequences.

“If the child receives a one-half interest in your home or other assets during your lifetime, the child’s basis in that asset will be the same as yours. This means the child will be liable for the capital gains tax on the entire increase in value of the asset,” Meti explained.

“However, if the child inherits the asset, the base will ‘rise’ to its value at that time, and the child will not be liable for ‘capital gains tax’.

So the best way to combat this, according to Suleiman and several other experts, is to establish a “revocable living trust,” as explained above.

“If you appoint yourself as a trustee, you will retain control of your assets during your lifetime and can also ensure the distribution of your assets after your death,” Suleiman added.

“You will also appoint a successor trustee who will take over management of the trust if you become incapacitated or upon your death. You will have the ability to change the terms of the revocable trust or revoke it in its entirety at any time during your lifetime. »

At the end of the line ?

In short, the choice you make could impact your home and your bank accounts. Before deciding whether to add your child’s name to your home deed or bank accounts, it’s important to consider the worst outcome, retirement planners reiterate.

“A little consideration and advanced planning will save you a lot of stress and heartache. Remember that estate planning requires prudence and practicality, rather than myopia and sentimentality,” added Suleiman.

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