Property owners have the authority to grant a portion of ownership to another person at virtually any time. An owner may want to add a name to the property title for a variety of reasons, such as marriage. An additional owner's name is added to the property title by a deed. Certain tax consequences are involved during this process.
Deed Transfer Process
Each state has established specific rules and regulations regarding deed transfers. Almost all states accept the quitclaim deed to add a name as an owner. A quitclaim deed provides no guarantee from the grantor to the grantee that the title is in good standing. The only function a quitclaim deed serves is to transfer the current owner's interest in the property to the new owners.
In the case of adding a name, the owner would grant his interest to himself and the other person. Once the deed is filed on record, the new owners' names become the current owners listed when a title search is conducted.
Deed Transfer Taxes
A lot of states impose transfer taxes on deeds. The tax collected is based on the consideration paid to the seller for the property. Often, when a name is added to the title and the original owner remains, no cash changes hands. A deed can cite zero dollars, or a negligible monetary amount such as $1 in these cases. If there was an exchange of money, transfer tax is owed.
Title Transfer Exemptions
The states that assess transfer taxes also usually offer a number of exemptions to the tax. The most common exemption regards transfers between spouses. Adding a spouse to the property title is usually exempt in most places. Other common exemptions include parent-to-child transfers. The local recorder of deeds or clerk is able determine if a deed is exempt or not.
Shared Property Tax Responsibility
The owner of real property is responsible for paying property taxes to the correct authority when they become due. By adding a name to the title through a quitclaim deed, the person added becomes equally responsible for property tax payments. Property taxes paid throughout the year are deductible on that year's income tax return.
IRS Gift Tax Laws
When you add someone to your deed, the IRS considers this transfer a gift from you, which is subject to the gift tax. If you add your daughter to the deed of your house, the value of the house is split 50/50, gifting your daughter half the home's value. For example, if you add your daughter to the deed of your $200,000 house, you've given her a $100,000 gift.
As of tax year 2019, you can gift someone up to $15,000 each year, tax-free without reporting the gift. If you give more than this amount, such as the example above, you must report the overage on IRS Form 709 (United States Gift [and Generation-Skipping Transfer] Tax Return. Using the example above, $100,000 - $15,000 = $85,000. You'll report $85,000 on Form 709. But you still won't owe gift tax on this amount unless you reach a total lifetime gift contributions of $11.18 million.