Adjusted Basis of a Home Quitclaim

Quitclaim deeds are used to transfer an interest in your home to another party. Sometimes used when a homeowner dies to transfer his property to an heir or following marriage and divorce proceedings, quitclaim deeds essentially provide the holder with possession of your home, or in case it has multiple owners such as following a divorce, your share of the home. As with many property transactions, the adjusted basis for quitclaim deeds is the amount of income invested in your home.

Basis vs. Adjusted Basis

When the Internal Revenue Service calculates capital gains taxes, it assesses gains – or profits – based on the amount above an asset’s basis for which you sell or transfer it. Your home’s basis is its purchase price. Unlike other assets, such as stocks, you may invest additional money into your home, raising its basis, known as adjusted basis. Adjusted basis includes the cost of improvements, though not maintenance and repairs, as well as real estate transaction fees and other costs incurred after you purchased the home.

Receiving Property Through a Quitclaim

When an heir receives property through probate, her basis on the property is calculated as the home’s assessed value at the time of the original owner’s death. The IRS views quitclaim deeds as a gift, and applies guidelines for determining its basis using those standards: Instead of your property’s value being reevaluated when you receive it, your adjusted basis in the home is the same as the basis for the person who held the property before she filed the quitclaim deed. For example, if your father signs a quitclaim deed on his home, which is worth $400,000 on the market, but he purchased it for $45,000 and placed $15,000 in improvements on it, your adjusted basis is $60,000, not $400,000 as if you inherited it.

Tax Implications of a Quitclaim

While the carryover basis of a home received through a quitclaim deed may not seem significant, it can have major ramifications when you sell the home. Because the IRS calculates capital gains taxes based on the home’s adjusted basis, if the original owner held the home for a long period when real estate appreciated significantly, you may be exposed to gains taxes you’d avoid if you inherited the property. In the example in Section 3, if the person sells the home for $400,000 after inheriting it, he’d sell it for the same basis as he received it, thus avoiding all capital gains. If he receives the home through a quitclaim, and sells it for market value, he reports a gain of $340,000 above his adjusted basis, and would owe gains taxes – usually 15 percent – for the $110,000 above the gains-tax exclusion for selling a home.

Quitclaim vs. Warranty Deeds

Quitclaim deeds are usually used when the original owner of the property isn’t selling it, while warranty deeds are typically used in transactions that involve money. Because of the nature of the deeds, quitclaim deeds don’t warranty the home when transferred, as would be the case with a warranty deed, so the original owner has many more legal protections when transferring a property with a quitclaim deed.