Q: My wife and I have a family trust. About six years ago, we exchanged one of properties for a house. This new house was community property with our son and his wife. They own 25 percent of the home and we own the balance.
For us, the property was an investment property and for them it was their primary residence. We are also co-signers on the loan. In our taxes, we showed the property as a rental and took advantage of depreciation and received rental income.
Our intention always was to gift our equity to our son every year, $12,000 per year per donor per donee. We have been doing it within these limits so that we don’t have to file the gift forms with the IRS. Over the last several years we have gifted all of our interest to them and have documented the gift each year.
How do we transfer the property to them? Can we use a quit claim deed to transfer the property to them? Will quit claiming the property to them trigger the loan to be called by the lender? Will it increase property taxes for them? And, how can we get ourselves off of the loan?
A: From the real estate perspective, the transfer of title from you to your son and daughter in law shouldn’t be a problem. You can simply transfer title to your son and daughter-in-law by using a quit claim deed or warranty deed and file that document along with any other documents required by the state and local authorities with the local recorder of deeds office.
Deciding whether to use a quit claim deed form or warranty deed form will be up to you and the custom in your area. In some parts of the country, quit claim deeds are not used and some title companies refuse to insure title when the former owner used a quit claim deed to transfer title to the new owner.
A quit claim deed merely transfers any interest the seller has to the property to the buyer without making any representation as to whether that seller has any interest or not to give. A warranty deed, and there are various types of warranty deeds and even other types of deeds that you can use depending on where you are located, will transfer the same ownership interest to the new owner but the deed will make certain representations of ownership and may also include certain obligations to that new owner should those representations turn out to be false.
Either way, the recording of the quit claim deed or warranty deed will transfer title from your name to the name of your son and daughter-in-law.
In some parts of the country, when there is a transfer of property the local tax assessor’s office or tax collector’s office will get notice of the sale or transfer of ownership and may have a right to reassess the value of the home. For example, if you own a property in some states, the taxes can’t go up by more than a certain amount each year and when the property is sold, the taxes could skyrocket to a higher level to reflect the much higher amount that properties of that type would pay.
In other parts of the country, a sale may not affect the real estate taxes at all as the taxes are increased whether the property has been owned for a long time or has recently been sold.
You need to determine whether you son’s and daughter in law’s original ownership interest in the home is sufficient to maintain the property taxes at the current level should you convey your interest in the home to them. You may find that the local assessor’s office or real estate tax collector’s office personnel can provide you with the information you need.
When it comes to getting your name off of the loan, the only way this will happen is by having your children refinance the loan when you transfer the trust’s interest in the home to them. Most lenders will not remove a name from a loan just because the title has been transferred to another family member. Since your son and daughter-in-law are still on the title to the home, the lender will not call the loan as a result of the transfer of the property to them, particularly when they are the ones using the home as their principal residence.
Your bigger issue might relate to your federal income taxes. You effectively gifted a portion of the home each year. As an income-producing property, your percentage of ownership declined each year and these changes should have been shown on your income tax returns. Furthermore, even though you were gifting the home in pieces to your children, you may have had tax consequences from the disposition of a part of the real estate each year.
While the actual quit claim deed or other deed may not be filed until later, you effectively transferred a part of your ownership interest to them yearly. The IRS might look at the situation as if you actually sold a piece of that ownership interest each year and should have declared that sale and paid any capital gains taxes associated with the gain along with the recapture of depreciation that you had taken on that property for that share of the home.
Please have a conversation with your tax preparer, a tax attorney or an estate attorney who can help shed some light on what your next move should be.