Should I Make My Adult Children Co-owners of My Home?
Older clients often ask us to transfer ownership of their house either to their children outright or to themselves and their children as joint tenants with right of survivorship. They want to avoid probate fees for their estate when they die, but there are many reasons this might not be the right choice for you.
Avoiding probate fees through joint tenancy
When you die, your estate is subject to “probate fees” and those fees can be avoided by conveying your property away while you are alive. Unfortunately, doing this often leads to more problems than it is worth.
In Ontario, probate fees (called “Estate Administration Tax”) are payable when your will is submitted to court to have the Certificate of Estate Trustee issued—a process known as “probate.” Probate is usually required before your executor can deal with your assets, such as investments, bank accounts and real estate.
Probate fees are calculated based on the value of your estate on your date of death. The first $50,000 is tax-free. The rest is subject to tax at 1.5%. For example, on an estate worth $1 million the probate fees would be $14,250.
If you hold real property (such as a house or condominium) as joint tenants with another person or persons, the real property will automatically pass to them and will not form part of your estate. When that happens, the property will not be subject to probate fees. Note that all joint tenants need to hold an equal interest in the property. Two joint tenants would each have ½ interest, three joint tenants would each have a 1/3 interest, and so on.
Problems with joint tenancy
If you decide to put one or more of your children on title as joint tenants, it can give rise to problems including loss of control, making the property subject to your children’s debts and triggering capital gains tax.
When you transfer an interest in a property to one or more of your children, even as a gift, for tax purposes you are deemed to have transferred the interest in the property at its fair market value. The transfer will trigger a capital gain if the property has increased in value since you purchased it. If you are living in the property as your principal residence, the principal residence exemption means you won’t have to pay tax on the capital gain. But any future gain accruing to your child will be taxable, unless your child is also living in the house.
If the property is not your principal residence, you will have to pay capital gains tax on the share of the increased value of the property transferred to your child. The capital gains tax will need to be paid when you file your next yearly income tax return. The tax payable can easily be significantly more than the amount of potential probate fees saved, and it will need to be paid sooner.
If your child has not bought their own first home yet, they will also lose access to the $4,000 first-time homebuyer Land Transfer Tax rebate when they buy one.
And if your child is not living in your house, any future increase in the value of the property will be fully taxed in their hands when the house is ultimately sold.
Questions to consider before deciding on joint tenancy
Once you convey a property to your child or children as joint tenants, the children become part owners of the property. After that, you will no longer unilaterally control the property. You will all need to agree on when to sell it and for how much, as well as whether to mortgage the property. It is possible to draft agreements outlining how the property will be dealt with in future, but those agreements invariably become highly complicated, and it is difficult to cover every eventuality.
These are just a few of the questions that can arise:
- What happens if your child becomes subject to a judgment or divorces?
- How are the proceeds to be split if the house is sold?
- Who is responsible for carrying costs, including insurance, realty taxes, repairs, utilities and mortgage payments?
- What if your health deteriorates and you are no longer able to live independently in the house? Who decides whether you are still capable of residing in the house in the event of a disagreement?
- What if financial circumstances change and you need to access more of the equity in the house to pay for a retirement home?
- What if one of your children experiences financial difficulties and needs to access their share of the equity in the home?
Joint tenancy is usually not the best approach
There are times when it is appropriate to consider adding your children to your title as joint tenants. For example, if you have a terminal diagnosis, it generally makes sense to consider such a transfer. But unless there is a pressing reason, we generally discourage it. Before you make such a transfer, we recommend that you speak to your accountant about any tax implications in your particular situation.
Before you transfer a share of your property, it’s a good idea to get an appraisal to justify the fair market value of the property both at the time you initially acquired it, and at the time the shares in the property are transferred to your children.
Contact our Real Estate lawyers to learn more about what happens when you gift or co-own your property.
