Preparing a deed conveying an interest in your home to a loved one is a relatively simple task, but rarely is it a good idea. It should never be done without examining the reasons for seeking this deed transfer, exploring alternatives and understanding the negative implications of this action.

The reasons most homeowners want to add someone to their deed are to avoid probate and to ensure that, upon their death, their home will go to their loved one. Unless the homeowner is prepared to deed his entire interest, adding another owner does not avoid probate, it complicates it.

“If you are going to gift your home, give it all,” says Michael Berson, a certified public accountant in Bethesda. “If you retain any ownership interest in your property, it will be subject to the probate court’s jurisdiction.”

Some alternatives to adding a loved one to your deed are transfer on death (TOD) deeds and revocable living trusts.

The District, Maryland and Virginia recently passed laws creating the TOD deed. If your home is essentially your only significant asset, a TOD deed is a better alternative to avoid probate. TOD deeds allow homeowners to deed their home to their loved one while still alive. But the transfer does not take effect until the homeowner’s death. In this way, TOD deeds provide the comfort of knowing that your loved one will automatically become the owner of your home upon your death.

The mechanics of TOD deeds are relatively easy. TOD deeds must be recorded in the land records office in the county where the home is located while the homeowner is still alive. The homeowner can revoke his TOD deed at any time if he later changes his mind.

A revocable living trust, when fully implemented, can also avoid probate. Trusts are separate legal entities. When you convey all your property into the trust, it owns the property, not you. Since you no longer own that property, it is not included in your probatable estate. Since these trusts are revocable, you can always change your mind regarding who gets your home. One key drawback of these trusts is that unless you convey all your property into the trust, you may still have to deal with the probate court for any property you forget to convey.

One of the drawbacks of deeding your home to a loved one, vs. leaving it to him in your will, is that when he sells it, he may become liable for capital gains tax. Capital gains taxes apply to the difference between the home’s net sales price and the taxpayer’s “basis.” Basis is your original purchase price, plus any capital improvements you made to your home. When you add a loved one to your deed, your loved one assumes your basis for capital gains calculation purposes. If your home has appreciated, your heir will be liable for capital gains taxes. On the other hand, if your loved one inherits his interest in your home, the IRS rules allow him to assume a “stepped up” basis equal to the home’s fair market value on the date of your death. This stepped up basis rule generally eliminates any capital gain.

When you add a loved one to your deed, you are in effect making a gift to him. IRS rules currently permit a taxpayer to gift a maximum of $14,000 per year, per person. Gifts in excess of this amount may trigger gift tax reporting obligations. At certain estate asset levels, gifts may trigger state and federal gift and inheritance taxes. If you believe that your estate may contain in excess $5.25 million in assets, you should consult with attorneys or CPAs who specialize in this complex area.

Adding your loved one to your deed also exposes your home to potential financial liabilities. For example, if your loved one has a monetary judgment entered against him, it can attach to his interest in your home. Aggressive creditors can force the sale of your home and use his portion of those sale proceeds to pay their judgment.

Other reasons not to add a loved one to your deed are that doing so may make you ineligible for a refinance or reverse mortgage. For homeowners approaching retirement age, the transfer of assets can have adverse consequences for determining Medicare eligibility. Finally, there is also always the risk that as time passes, your loved one may not love you back and make it difficult or impossible for you to sell, rent or refinance your home.

Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Harvey at (301) 300-6252, jacobs@jacobs-associates.com or ask@thehouselawyer.com.