Dear Liz: I want to make sure a close friend of mine gets my house after I pass away. Which is better tax-wise for this friend, adding her to my deed or leaving the house to her in my will? My fear of leaving it to her in my will is that a family member may try to contest the will. While I will leave my family member money in my will, I want to make sure that the house goes to my friend.
Answer: If you add your friend to the deed, you’re making a gift of the home to her during your lifetime. That means if she ever sells the house, she could owe taxes on the appreciation that happened since you purchased the home. If you bequeath the home to her, on the other hand, the gains that occur during your lifetime won’t be taxed. You can leave her the home via a will, a living trust or, in many states, a transfer-on-death deed. (You can read more about this option in the next section.)
If you’re concerned about someone fighting your decision, please get appropriate legal advice. Estate planning can get complicated, and most people would benefit from an attorney’s help, but that’s especially true if you have contentious relatives.
Paula says
Dear Liz, Regarding adding a person to the deed on property in Texas, does the same hold true on property as a home? That is, can the property appreciation be taxed?
Liz Weston says
If it’s sold, yes. IRS Publication 523 explains the rules.