Adding a name to a deed may seem like a simple way to avoid probate or prepare your home for the next generation. But this seemingly harmless shortcut can cause a major tax surprise—one that could cost your loved ones tens of thousands of dollars.
To understand why, we need to look at how capital gains tax works—and how a built-in tax benefit can vanish if you add someone to your deed before you die.
Adding a Name to Deed vs. Understanding Basis and Capital Gains
The basis of a property is usually what you paid for it. If you bought your home for $150,000, that’s your basis.
When the property is sold, the IRS calculates capital gain by subtracting the basis from the sale price. If you sell the home for $850,000, the gain is $700,000—and that gain is subject to capital gains tax, typically at 15% or 20%, depending on income.
Sale price: $850,000
Original basis: $150,000
Capital gain: $850,000 – $150,000 = $700,000
Capital gains tax at 15% = $105,000
Capital gains tax at 20% = $140,000
However, if the property is your primary residence, you may qualify for a capital gains exclusion of up to $250,000 if single, or $500,000 if married and filing jointly, so long as you’ve lived in the home for two out of the past five years. This exclusion can reduce or eliminate tax on a sale—but it doesn’t apply to inherited property, which is why the step-up in basis is so valuable.
Step-Up in Basis and Inherited Property
When someone dies owning appreciated property, the tax basis is “stepped up” to match the property’s fair market value on the date of death. That eliminates any capital gain that occurred during their lifetime.
The step-up happens automatically under federal law. Even if your estate goes through probate, your heirs receive the step-up. If they sell the property soon after inheriting, there’s often no capital gains tax at all.
Let’s say you bought your home for $150,000 and it’s worth $850,000 when you die. Your child inherits it. Their basis becomes $850,000. If they sell it shortly after for that same amount, there’s no gain.
Sale price: $850,000
Stepped-up basis: $850,000
Capital gain: $850,000 – $850,000 = $0
Capital gains tax: $0
Adding Name to Deed During Life Can Backfire
Now let’s say you add your child to the deed before you die. It might only cost you $500 to have a new deed prepared. But in doing so, you’ve given away part of your property during your lifetime—and with it, you’ve passed along your original basis.
That means your child won’t receive a step-up in basis on the portion they already own. If the property is later sold, they may owe capital gains tax on that portion.
Example: The Cost of Adding a Name to a Deed
You bought your DC home in 1994 for $150,000. In 2024, it’s worth $850,000.
Scenario 1 – You Do Nothing and Your Child Inherits the Home
You keep the deed in your name. When you die, your child inherits the entire property with a stepped-up basis of $850,000. If they sell it right away for $850,000, there’s no capital gain.
Capital gain: $850,000 – $850,000 = $0
Capital gains tax: $0
Scenario 2 – You Add Your Child to the Deed During Life
You add your child as a 50% co-owner. At your death, your half receives a step-up to $425,000, but your child’s half keeps your original basis of $75,000 (half of $150,000).
If the home is sold for $850,000:
Your half (stepped-up):
Sale price: $425,000
Basis: $425,000
Gain: $0
Child’s half (gifted during life):
Sale price: $425,000
Basis: $75,000
Gain: $350,000
Capital gains tax at 15% = $52,500
Capital gains tax at 20% = $70,000
That’s a tax bill of up to $70,000—entirely because your child was added to the deed instead of inheriting. And if your child never lived in the home, they don’t qualify for the $250,000 exclusion. The entire gain is taxable.
This is the hidden cost of a $500 deed.
Even if the home had gone through probate, legal fees and court costs would have totaled around $4,200—a fraction of the tax liability created by losing the step-up.
Avoiding the Tax Trap While Avoiding Probate
If your goal is to avoid probate and preserve the full tax benefits, a revocable living trust is the most effective solution. It allows you to:
Maintain full control of your home during your lifetime
Avoid probate entirely
Ensure your heirs receive the full step-up in basis
Prevent costly, irreversible tax consequences
Final Thoughts on Adding a Name to a Deed
Adding a name to your deed might seem like a harmless shortcut. But it can lead to an unnecessary five-figure tax bill and undo one of the most generous tax breaks available under federal law.
Before taking action, talk to an estate planning attorney. We’ll help you protect your home, preserve the step-up in basis, and save your loved ones from tax mistakes that can’t be undone.