What is a deed? It’s the legal document that indicates who owns a certain piece of property and is used to transfer ownership of real estate from one party to another. In addition to identifying the seller/ transferor and the buyer/ transferee, a deed contains a legal description of the property and a description of how the property is held.
As you can imagine, there’s a lot at stake with a deed—not only at the time of purchase, but afterward. Let’s take a look at some common homeowner deed mistakes, and how to avoid them.
Homeowner Deed Mistake #1: Not Reviewing Your Deed for Accuracy
Your deed is the document that proves that you own your home. As such, when you purchase your home, you should review the deed with your attorney to be sure that it reflects what you need it to. Specifically, you should ensure that:
The deed complies with all legal requirements to transfer the property
Your name, and the name of your co-owner(s), if any, are spelled correctly
The deed correctly describes the type of ownership, such as tenancy by the entireties, joint tenancy with rights of survivorship, or tenancy in common. This is critical because the type of ownership dictates rights to the property in the event of the death of a co-owner.
The deed accurately describes the property being transferred.
Most deeds are accurate, but you should never assume that this is the case. A careful review of the details of your deed can prevent a catastrophic outcome if there is an error—or give you peace of mind that there is not.
Homeowner Deed Mistake #2: Failing to Record Your Deed
Recording a deed means to place the deed on file with the county Register of Deeds. It’s not necessary to record a deed for the deed to be valid between a seller and buyer, but recording is important to give the public notice of the ownership of the property.
Recording a deed is necessary to prevent disputes over ownership—for instance, if a seller executed deeds for the same property to two separate buyers. If one buyer promptly recorded their deed, and the other failed to, the buyer who did not record their deed would likely be on the losing end in a dispute over ownership of the property. The lesson: as soon as you have reviewed your deed and confirmed that it is complete and accurate, you should record it.
These are some mistakes that frequently occur around the time that people buy property. But some deed mistakes occur years afterward, in the context of attempts at estate planning.
Homeowner Deed Mistake #3: Putting Others on the Deed as Owners
As mentioned above, when there are multiple owners on a deed, the form of joint ownership matters. Some forms of ownership (like joint tenancy with right of survivorship) allow the property to pass directly to a co-owner on the death of the other co-owner. This happens automatically, without the need for probate or other legal documents.
Because of the simplicity of this process, many people add others (like adult children) as joint tenants with rights of survivorship. This can create a host of problems.
Property Tax Reassessment
In some (but not all) states, creating a joint tenancy may trigger a property tax reassessment, resulting in an increase in property tax, sometimes as much as hundreds of dollars per month.
Capital Gains Consequences
Ordinarily, when property passes from one person to another through inheritance at death, the transferee takes a step up in cost basis. That means that when they sell the property, the amount of gains on which they must pay capital gains tax is lower.
When you put a family member on the deed by creating a joint tenancy, they take your basis for part of the property when the deed is executed. If they later take your share of the property upon your death, they receive a step up in basis only for that portion of the property. If there is a significant amount of time between the creation of the joint tenancy and the death, that could translate to a significant increase in the amount of capital gains tax owed.
Difficulty Selling the Property
When you create joint ownership of property by putting someone else on the deed, it is not simply an estate planning device; they have a present ownership interest in the property. That means that if you decide you want to sell, you must get the permission of the other tenant(s), and they could assert a right to some of the proceeds of the sale.
Vulnerability to Co-Owners’ Creditors
Because your co-owners have a present legal interest in the property, that means any creditors they have may be able to come after the property when collecting a judgment against a co-owner. That might mean putting a lien on the property, so that the creditor could claim their share of the proceeds first when the property is sold.
Jeopardizing Medicaid Eligibility
Transferring all or part of the interest in your home to a family member can also jeopardize your eligibility for Medicaid benefits in the event that you need nursing home care. If the transfer takes place within the five year “look-back” period before you apply for benefits, the Medicaid program might view it as a fraudulent attempt to transfer assets, delaying your eligibility for benefits by months or years.
Adding a family member to the deed for a primary residence could also be considered a transfer of ownership, jeopardizing the home’s status as an exempt asset for purposes of determining eligibility for Medicaid.
Avoiding Deed Pitfalls
If you are looking for a way to transfer your property to loved ones either during your lifetime or after your death, it’s a good idea to speak with an experienced estate planning attorney to ensure that you avoid unintended consequences and protect your own interests.
An attorney can advise you on the best tools to make the transfer while avoiding unnecessary taxation, risking Medicaid eligibility, or making the property vulnerable to creditors. A living trust can be a useful tool; however, as attorney Danielle Mayoras shared with CBS News Detroit, it’s important to update your homeowner’s insurance to reflect the trust as owner of the property to ensure continuity of coverage.
Another option is a ladybird deed, also known as an enhanced life estate. This allows you to transfer a future interest in your property while maintaining full control of it until your death.
The knowledgeable estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras can help you plan for your property’s future while protecting your own. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.