Quit Claim Deed Leads To Capital Gains Tax

Added June 18, 2006 by Ilyce R. Glink

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Summary: When you receive ownership to a property through a quit claim deed, you also get the property at the cost basis that the previous owners had. This may lead to capital gains taxes when you sell the home. To know how much capital gains tax you will owe, contact a tax preparer such as an accountant or enrolled agent.

Q: Prior to the death of my parents, they signed over their house using a quit claim deed to me and my brother.

The house is now up for sale. Will we have to pay capital gains taxes on this sale?

Also, have you ever heard of a one-time deferment on paying capital gains?

A: Unfortunately for you, the fact that your parents gave you their house before they died means that you also were given their cost basis for the property. Depending on what their cost basis is (the cost of purchase plus the cost of any capital improvements plus the costs of sale subtracted from the sales price) you may owe capital gains tax when you sell.

The only good news is that at least it will be long-term capital gains.

If you had inherited the house, you would have inherited it at its current market value instead of at their cost basis. This is called the "stepped-up" value. When you sell, you would only pay capital gains tax on the difference between the stepped-up value and the sales price, minus the costs of sale. Typically, if you're selling soon after your parents died, the actual sales price counts at the market value for estate tax purposes. So, you'd owe nothing.

As far as I know, there is no exclusion or deferment for capital gains tax. Please consult your tax preparer for more details.

June 18, 2006.

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