Q: My dad passed in October and my mom wants to quitclaim a rental property to me. The property was reappraised because of my dad’s passing at a current market value of $65,000.
Would the property tax remain the same and slide over to me? Also, if I sold the property in the future would the capital gains start at the new appraised price or when my parents bought the property?
A: I’m sorry for your loss. But why does your mother want to use a quit claim deed to give you this property? It might be better for tax purposes if you simply inherited the property from her or bought it from her outright.
In some parts of the country, when you sell a property, the taxing authority will reassess the value of the property and you may face a substantial increase in your property taxes. Frequently these tax assessment freezes apply to an owners principal residence, but in some cases assessors don’t reassess commercial properties to the same extent as when they are sold. It is when they sell that the assessor can see what the buyer actually paid for the property and then raise the taxes on that property.
While you may receive the property through inheritance or by using a quit claim deed, you should property talk to a real estate attorney in your area to see if either option would make a difference for you when you take title to the building. In some counties, you can even call your local tax collector’s office or assessor’s office and talk to someone to determine how they would treat the transfer of the property to you: if by quit claim deed or by inheritance.
Once you know what the real estate tax impact will be to you, you’ll have to determine what the impact will be to you in the future if you inherit the property or receive the property by quit claim deed.
It’s possible that there may not be much difference to you if you receive the property by quit claim deed or by inheritance this year. For real estate inherited this year, you would inherit the property at your father’s basis. Your father’s basis would be the amount he paid for the property, plus any capital improvements he made to the property and the costs he paid to buy the property.
If you receive the property by quit claim deed, that transfer might be considered a gift to you and you would receive the property at your mother’s basis for the property. Your mother’s basis may be the same as your father’s and in that case it might not mater for federal income tax purposes whether you inherit or receive the property by quit claim deed.
You should use caution when receiving a property via quit claim deed. In some places, quit claim deeds are frowned upon and if you need to finance the property in the future, you might have problems.
As a final note, due to the expiring tax laws passed about ten years ago, this year is the exception to the manner in which inherited property is treated. You used to inherit property at its current market value so if your father had purchased the property some time ago and had a sizeable profit on the property and he died and you inherited the property, you could then sell the property and not pay federal income taxes on that sale. But that was the prior law and this year that part of the law no longer applies. What the law will be next year is still up in the air.
As a result of these complicated issues, please talk to an accountant or to an estate attorney to make sure that you’re not setting yourself up for future tax problems.