Q: My father owns a house free and clear that has been vacant for the past three years. I’ve paid the taxes on his house for the past 3 years. Due to minor medical issues he currently lives a house that I own. He wants to transfer his vacant house into my name.
My father doesn’t have the financial resources or the motivation to make the many repairs needed to get the house ready to rent or sell. In fact, he just wants to be done with it. He’s on a fixed income and can’t afford to keep up the insurance and taxes.
What’s the best way to go about accomplishing this? Should we use a quit claim deed or a warranty deed? Should I buy the house for a nominal fee? I’m not sure which way to proceed.
A: There are several ways your father can transfer ownership of the property to you. He can sell the property to you, he can just give you the property, or he can put the property into a trust and name you the beneficiary.
From a tax standpoint, you may have a problem if your father just gives you the property, transferring his ownership interests to you via quit claim deed or any other type of deed. You will receive the property at his cost basis, possibly setting you up for an expensive tax bill down the line.
Likewise, if you purchase the property for a low price, you may also have a higher tax bill.
But if your father puts the property into a trust and names you the beneficiary, you will inherit the property at its current market value on the date of your father’s death. If you turn around and sell the property, you likely wouldn’t owe much, if anything, in taxes.
As the beneficiary of the trust, you could pay the expenses of the property, as well as the upkeep and insurance. You may also be able to rent out the property.
Then, when your dad passes away, you’ll inherit the property and be able to minimize or eliminate taxes you pay on the sale.
If your father bought the home some time ago but the value of the home now is about the same, you may not have any federal income tax issues transferring the property from his name to you. But you may have other issues. In some states, the local real estate tax board can reevaluate the real estate taxes on the home and the taxes could go up considerably even if the value of the home hasn’t increased. You may also have costs involved in transferring the property from his name to your name.
But if you decide to go forward and transfer title of the home from his name to your name, you could use a quit claim deed or even a warranty deed. In some states you shouldn’t use a quit claim deed as they are frowned upon. For practical purposes, the only difference between a quit claim deed and a warranty deed is that the seller in a quit claim deed does not represent to own a particular piece of property. If the seller owns it, great, otherwise the buyer gets whatever interest the seller has in that piece of property.
In contrast to a quit claim deed, a seller using a warranty deed actually represents that he owns the property and will protect the buyer’s ownership interest should one of the seller’s representations under the deed end up being untrue. If the seller ends up not owning a property, the buyer can sue the seller for the breach of representations in the warranty deed. You can’t sue a seller using a quit claim deed in this manner.
As there has been quite a bit of fraud in recent years, some local municipalities and title companies no longer recognize the validity of quit claim deeds. They would prefer to see a warranty deed or any other deed other than a quit claim deed. And there are other types of deeds depending on the state and the type of transaction.
Please consult with an estate attorney on the best way to proceed.
If you need a quit claim deed form, you can buy one here.