Removing a co-signer from a property title

Dear Tax Talk,
My 88-year-old father has had a mild heart attack and he now lives with my wife and me. He was married, but his wife died about five years ago, after which he lived alone. When he bought his home, his wife had bad credit so her daughter signed for the loan. The loan is now paid off and my father would like to have his ex-daughter-in-law's name removed from the deed.

I thought it might be best to leave this alone. I know that he will look to me to find out and help pay any buyout costs. What do I do? He bought the home for just under $26,000 and it may now be valued at over $50,000. Neither he nor I have a good tax lawyer. Perhaps we need one. -- Butch

Dear Butch,
Your problem isn't so much centered on taxes as it is on inheritance issues.

Because your father's daughter-in-law is on the title of the property, she stands to inherit the house upon his death. Since this is probably not your father's wish, something needs to be done to clean up the title before it's too late.

If your father wants to continue owning the home, then the daughter-in-law should at a minimum execute what is referred to as a quitclaim deed. Basically, a quitclaim deed would relinquish the daughter-in-law's claim over the property. However, a quitclaim deed is a legal instrument and its appropriateness in this situation and in your state should be reviewed with an attorney to be certain that it accomplishes the desired objective.

Alternatively, if your father does not anticipate returning to the house, he probably should consider its sale. Since this has been his home, he would qualify to exclude the gain on its sale. An individual who sells their home in which they have lived and owned for two of the last five years qualifies to exclude from income up to $250,000 in gain from its sale.

Once the property is converted, your father can readily decide what he wants to be done with his inheritance. If this is all he has, then he could simply open a joint account with you where the funds would pass to you directly upon his death avoiding the need for costly probate proceedings.