Q: I have read many articles from you concerning quitclaim deeds. I have a very specific question related to it.
Does the IRS say the grantor is giving a gift to the grantees when someone records a new quitclaim deed that includes the children? My accountant and lawyer state that the IRS doesn’t say this is a gift.
My mom is older and owns her home worth about $150,000. She is quitclaiming her home to me and my sister. As it was explained to me, this only includes an interest in the house. It still belongs to my mom and if she sold it, she would get the proceeds. If she died, then the children would get the house without going through probate and the adjusted cost basis for the house would be at the time of the death.
A: We think the problem is not whether we’re right about quitclaim deeds, but whether you’ve confused a quitclaim deed with a transfer on death deed.
In a quitclaim deed, your mother conveys to you and your sister her interest in the property. After the quitclaim deed is filed, your mother would no longer own any part of the home. That’s because she conveyed title to you. That quitclaim deed would essentially transfer all of your mother’s interest and ownership in the home to you and your sister.
A transfer on death deed (which is known by different names around the country) is an instrument that does not transfer any interest today in a home to those individuals designated in the deed. In fact, the owner of the property continues to own the home and can even revoke the transfer on death deed or can decide to sell the home to a different person while they are still living.
The purpose of a transfer on death deed is to give the owner the option to designate who will own the property if the current owner dies. The owner could name the heir of the property in a will, but the intended beneficiary would have to wait for the court in probate to issue a deed to transfer title from the deceased owner to the intended beneficiary.
In an attempt to avoid probate court, the transfer on death instrument would take effect on the death of the owner of the home. Transfer on death instruments are relatively new and some states and title insurance companies are trying to work through some problems they see with these sorts of documents.
In terms of your question, the quitclaim deed that transfers ownership would transfer that ownership at the time the deed is given to the new owner and recorded. For federal income tax purposes, the transfer date would trigger any tax issues.
On the other hand, the transfer on death instrument causes what is known as a “taxable event” at the time the person dies. In your example, the value of the home at the time the transfer on death instrument is recorded might not be relevant. It only matters what the home value is when the person dies.
The heir that takes title on a transfer on death deed will likely take that title to the property at the value the property had at the time of that death. If the property has gone up in value, the new owner’s basis (cost) would be the value at or around the time of the death. That’s helpful if the new owner wants to immediately sell the property at the new higher value because taxes would be minimized.
In a quitclaim deed situation, the new owner takes title with the cost basis that the owner had on that property. If the owner’s basis was $50,000 and the property is worth $150,000 at the time of that person’s death, the new owner would have a basis of $50,000. And if that person sold that property for around $150,000, that person would have a profit on the sale of about $100,000 even though the new owner might have only owned the property for a very short period of time and the property never appreciated during that time of ownership.
In the same example, the new owner would inherit the property at $150,000 and then sell for $150,000, pocketing the cash without paying tax.
We generally tell people to avoid taking title through a quitclaim deed for these reasons. However, we might favor living trusts over transfer on death instruments. Living trusts have been around longer and don’t create headaches for title insurance companies. For more details, consult an estate attorney or knowledgeable real estate attorney.