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Tax ramifications of adding brother to deed on house
I recently bought a house with my brother in CA, for loan purposes, the title was put into just my name. I have been looking at adding my brother to the deed as we are splitting all the payments 50/50.
If I do not add my brother to the deed, would I be responsible for paying income tax on the 50% of the mortgage payment my brother pays? Or is his payment considered a gift? Or are there no tax ramifications to that arrangement?
If I do add my brother to the deed, would this result in a gift tax for 50% of the property? Would this trigger any other immediate tax ramifications?
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Deductions & credits
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You said you bought the house "with my brother." Did he pay half the cost (or half the down payment)? If so, you're not giving him anything by putting him on the deed. He already paid for his share of the house. You're just formalizing the fact that he's a half owner. So again, no gift and no gift tax. But if you paid the entire cost, and are the sole owner, then you would indeed be making a gift of half the house by adding him to the deed. You would have to file gift tax return, but you would not have to pay any gift tax unless your total lifetime gifts (to everyone, not just your brother) are more than about $5.4 million, including the value of the half of the house that you give him.
The other tax ramifications, which you haven't asked about, involve claiming itemized deductions for mortgage interest and real estate tax. You can only deduct what you actually pay, so if you and your brother each pay half, you can't deduct what he paid. Normally you have to be an owner of the house to claim the deductions, so your brother wouldn't be able to deduct what he pays. But if he paid half the cost of the house, and he lives in it, he would probably be considered an "equitable owner" for income tax purposes, even if he's not on the deed, so he would be able to deduct the share of the mortgage interest and real estate taxes that he pays.
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If we do not add him to the deed, would I need to pay income tax on his portion of mortgage or would he need to pay a gift tax on that portion?
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No income tax or gift tax on his portion of the mortgage payments. Again, you're just sharing expenses. If he's going to claim a deduction for his share of the mortgage payments, though, it would be better if he wrote a check directly to the lender, for purposes of supporting the deduction in case the IRS questions it, especially since his name is not on the Form 1098. But that raises another issue --
The mortgage lender might object to your putting your brother on the title, since that reduces your ownership interest, and your brother is not obligated on the mortgage. The mortgage probably says that the full balance is due immediately if you change the ownership of the house. You have to be careful not to trigger that. This is not a tax question, and is outside my area of expertise. Maybe it's possible to add your brother to the mortgage as well as the title. Before you do anything, you should discuss your plan with a real estate lawyer or a mortgage broker, or both.
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He's not on the deed or mortgage now because I acquired a better loan rate applying just by myself. Our loan officer suggested that we could add his name to the deed without issue after closing escrow. Perhaps I should encourage her to have a conversation with the underwriter to confirm.
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This sounds like my story. Both my broker and lender were quick to say that is easy to add a sibling to title... 8 months later I'm still trying to add him and wondering if I made a mistake by not adding him from the get go..