A quitclaim deed conveying the title of a home to a living trust can result in a stepped up basis when selling the home, but if it is unrecorded it likely will not be of any help.
Q: In response to your recent article about a father who transferred title in his home to his trust, never recorded the deed and then transferred the home to his child, I have the following comment.
An attorney friend of mine told me that if the dad quit claims his home to his child, but the Dad continues to exercise all rights of ownership (lives in it, pays all expenses, etc.) and the child never takes “possession” of the home, that the ownership transfer did not occur and the child can still get a stepped-up basis when his father dies.
On the other issue of whether the unrecorded quitclaim deed to a trust is effective, that might depend on state law. But if it were from “Dad” to “Dad as Trustee,” it still might just be Dad as the owner (because he owns the trust) transferring ownership to his son, and make believe that it was as if the son got the title on the father’s death from the trust.
A: You make some great points. In our prior reader’s question, the son had taken title to his father’s home while he was alive to help him out in refinancing the property. They began to refinance the property, realized there might have been a problem and the father died before they could fix the situation.
Later, after the father’s death, the son found an unrecorded quitclaim deed that would have conveyed title to the home to a living trust. The question was whether the son’s basis in the home was his father’s basis or did the son get a stepped up basis at the time his father died.
If the son took the home as a gift while the father was alive, the son would stand in his father’s shoes for federal income tax purposes. And, when the son sold the home, he’d have the same cost basis, and would owe the same tax, except he would be unable to exclude the $250,000 in profits from federal income taxes because he would not have been selling a primary residence.
If he got the stepped up basis, meaning that he would effectively inherit the home at the market value on the day of his father’s death, and sold the home within a few months of his father’s death the sales price would effectively set the value of the inherited property and he would have no taxes to pay.
Your friend makes an interesting argument. However, we question whether the IRS would see it that way. The father would have been unable to sell the home during his lifetime after he transferred title to his son. If the son had sold the home while the father was alive, the father would not have been able to claim the tax exclusion and the son would have been left with the same tax obligations.
To claim, after the father’s death, that the son didn’t really own the home may be a position the IRS would accept, and maybe your friend has successfully argued that position in other cases. From the state law perspective, you might be able to claim that the execution of the deed from the father to his trust, even if not recorded, was sufficient to transfer title to the trust.
The father later signed a deed transferring title to his son. If the son took any action with respect to the home, like refinancing it, those actions would have been inconsistent with the claim that the father still owned the home.
You’re right that there may be other factors involved and, perhaps, state law could influence the outcome. The conservative approach might be that the first deed didn’t convey title to the trust, and that the second deed was the only deed that should be considered.
The more aggressive tax position would be that the initial deed to the trust was valid, even if not recorded, and the second deed was not a valid deed. Then, for IRS purposes, the son would have to argue that the deed he received did not transfer the home to him and that he actually received his interest in the home at the time of his dad’s death.
Given some of your suggestions, our prior reader would be well suited to talk to a professional that can give him some tax advice. But until he is able to undo or ignore the transfer, the son has title of the property in his name. While we like your reasoning, the father and son intended to transfer title of the home to the son while the father was alive.
We’d love to know the outcome of the situation from our reader to see whether he was able to ignore the recording of the deed giving him title to his dad’s property while his dad was alive.
Thanks for your comment.