Are Quitclaim Deeds As Easy As They Sound, or Are They a Tax Trap?

 
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Quitclaim Deeds

There is something interesting we have come across over the past few months, people changing owners on the deeds to their home. There is an array of reasons why you might want to do this, but most commonly this is found in families who want to easily transfer ownership from siblings or parents to children. The process is simple using a Quitclaim deed to add or remove someone to your property’s title or transfer the title entirely. When this document is prepared and executed, it gives (or takes away) a legal ownership interest in the property. The deeds get their name from you “quitting” your ownership claim in the home. Due to their relative easiness, they are often mistakenly referred to as “quick claim” deeds.

Quitclaim deeds differ from other typically used house deeds. Other deeds are accompanied by warranties that promise proper ownership and selling rights by the grantor. The grantee of a quitclaim deed does not receive the same assurances. Thus, if a grantor does not have proper selling rights, then the grantee will ultimately receive nothing on their end of the transaction.

Blah blah blah, why does anyone care?

Because we’ve seen too many cases of clients getting into hot water using the “easy” method. See the reasons below…

Taxes

Quitclaim deeds do not rid the grantor of tax obligations. If the grantor owes taxes from the period during which they legally owned the property, those taxes must be paid prior to the transaction. Additionally, if there are tax liens on the property for other reasons, they too must be paid before the title can transfer. The grantee cannot establish a clear title until the back taxes have been paid. However, once a grantee accepts a clear title on the property, they inherit the responsibility of paying the newly acquired property taxes. The grantor no longer is obligated to pay future taxes on the property.

Mortgage Obligations

You can’t quitclaim deed away your mortgage obligations. Actually, if you think about it, if you quitclaim your ownership to someone else you could be paying a mortgage on a house you no longer own. Not very smart…

Tax Return Implications

Finally, the most commonly made mistake. Something that many taxpayers do not realize is that by simply avoiding typical selling costs and following a customary transaction, this does not make you free from paying taxes on the transfer of property. According to U.S. tax code, the quitclaim transaction is classified as a gift with no money changing hands. That being said, a gift tax return must be filed and any taxes due paid by the grantor, unless the recipient of the property agrees to make the payment. Gift taxes are based on the fair market value of the home at the time of the transfer, no other amount.

Gift taxes have annual and lifetime tax exemptions which limit the amount of taxes that must be paid in a transaction. There is a lifetime gift tax exemption of $11.4M (for single taxpayers). Although this seems hefty, the annual exemption is only $15k for each individual transaction that occurs in a year (as of 2019). Thus, a gift tax return must be filed if the home being quitclaim deeded to another individual exceeds this annual gift tax exemption amount, and taxes are paid only on the amount that exceeds the lifetime exemption.

Let’s run through a quick example

If you give your cousin a $100k home, you will have a reportable gift tax event of $85k ($100k - $15k). You should file form 709 with the IRS to report this transaction to reduce your lifetime limit. From $11.4M to $10.55M (for single taxpayers in 2019). Repeat this a few times in your lifetime and suddenly there is no gift tax exemption leftover. This could harm your heirs when you pass away since this computation might be necessary to calculate what is taxable upon your death and if there is no exclusion left you could be leaving a heavily taxed estate to your heirs.

Next time you want to give up your share of a property to someone make sure you consult with your tax advisor before you execute a quitclaim deed. Although it may seem unlikely that you’ll ever reach the limits set forth for the lifetime exclusions, there is always the chance they could be reduced or eliminated and suddenly this could be a trap.