Many families pass property from one generation to the next. Often, this is done after a property owner has passed away and is part of the probate process. But there are also instances when a property owner wants to transfer ownership to another family member or close friend while still alive. For example, parents want to gift their children a piece of land as a wedding gift. Instead of going through the sometimes complicated and expensive process of a traditional property transfer, the owner will execute a quitclaim deed to the other family member. Although most quitclaim deeds are executed between family members, they can also be used between two parties who know each other well. For example, a divorcing couple can use the process to transfer property from one to the other, or a person who owns property can grant partial ownership to another person. However, before initiating any form of transaction, it is essential that you understand the tax implications of adding someone to a deed.
Quitclaim deeds represent an easy and effective way to transfer property to family members after death. That being said, tax repercussion might come into play if and when the property is sold.
Finding More Information About Quitclaim Deeds
A quitclaim deed (often mistakenly referred to as a "quick claim deed") is a simplified process of transferring property from one person to another. It is most often used in families when one family member wants to transfer ownership to another family member without going through probate or the sale process. Unlike a warranty deed, a quitclaim deed does not offer any guarantees regarding the property. Also, no specific property interests are included in this type of deed, which could be problematic if the property owner wants to sell the property. With that in mind, it is crucial that you take the time to fully asses the tax implications of deed transfer.
Many people choose quitclaim deeds because they're more convenient. They don't require title searches for liens. It is a quick and simple process for transferring property, which is one reason they are also incorrectly referred to as "quick claim" deeds since the process takes a fraction of the time and effort of a normal purchase or property transfer. A quitclaim deed can also be used to correct errors on the original deed or settle a boundary dispute.
Looking For Tax Implications
There are specific responsibilities for both parties involved in the quitclaim deed. Because a quitclaim deed does not require a title search, the person who is gifted the house deed might also inherit unknown tax obligations, such as liens or property line disputes that affect the actual value of the property. Anyone agreeing to this transaction should be as sure as possible that such a scenario does not exist or agree to take on the financial obligation if it does exist.
Obtaining a Property
Although quitclaim deeds are an easier way to leave property to family members, if at any point the property is sold it can create a tax burden for the seller. This is especially true if the property has increased in value since the deed was executed. If the giver inherited the home and then executed the quitclaim deed to another person, the person gifted the property could sell without paying capital gains tax.
If the giver was gifted the home via a quitclaim deed and then executed a quitclaim deed to another person, the person gifted the property would be on the hook for capital gains tax if he chose to sell the property. Depending on the value of the property, this could result in a hefty sum.
For the giver, the quitclaim deed is considered a gift if the transaction is not a sale. As such, that person is required to file Form 709 - United States Gift (and Generation-Skipping Transfer) Tax Return with the IRS. Half of the value of the property can be applied to the tax burden, up to a maximum of $5.5 million. If there are any back taxes due, although the recipient would not be responsible for paying those taxes, he would be unable to move forward with plans for the property, such as selling it or possibly using it as collateral until the back taxes were paid.
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