Tax ramifications of adding brother to deed on house

[thomaselliott728]

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?

[SweetieJean]

Please read this recent similar thread:

https://ttlc.intuit.com/questions/4133066-how-are-irs-taxes-charged-when-there-are-more-than-one-per...

[thomaselliott728]

That thread has more to do with inheritance and ownership upon on death. It has nothing to do with tax ramifications on property deductions and income tax which is what I'm asking about.

[SweetieJean]

Any time you give something of value that exceeds $14,000 during the course of the year, you have made a taxable gift to your brother. This includes adding his name to your deed. If he does not pay you anything to be added to the deed, then you have made a taxable gift. As a result, you will need to file a federal gift tax return on IRS Form 709 in order to report the taxable gift to the IRS.

[rjs]

Do you and your brother both live in the house? If so, the two of you are just sharing expenses. There's no gift, and no gift tax.

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.

[thomaselliott728]

He does live in the house and he paid for half the down payment but it was paid to me and then I paid the full payment. I'm not sure if that changes things or if it's just semantics.

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?

[SweetieJean]

Is he on the mortgage?

[thomaselliott728]

No he is not on the mortgage

[rjs]

It sounds like just semantics to me. He paid for half the house.

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.

[thomaselliott728]

If there is no income or gift tax assessed for his portion of the mortgage payments, there may not be any need to add him to the deed. I was thinking we should open a joint bank account and pay the mortgage from that so that there would be a clear trace of monetary contribution in his name.  I could also just claim 100% of the deductions and cut my brother a check for half of the tax savings (which should be well within 14k gift tax limit)

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.

[TomD8]

The deed should reflect reality.  Since your brother is in fact your co-owner and is paying 50% of the costs, you definitely should add his name to the deed and pay the mortgage and taxes from a joint account.  This is a much cleaner method than your paying 100% and cutting him a check.  Adding his name to the deed will let him deduct the 50% of the property taxes and mortgage interest that he's paying, and also lead to a 50/50 split of the capital gain (if any) when the house is sold.  Doing so will also help avoid future legal/tax complications, for example if one of you should die.

[GinaN21]

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..