How to Buy Out a Family Member’s Share of Investment Property

How to buy out a family member’s share of investment property. A quit claim deed or warranty will do the trick, but each have their own benefits.

Q: My wife and I, along with my brother and his wife, bought a vacation home in 2010. Each couple took half. The home is in California and the four of us are Canadian.

The title for the home in California was put in the name of my wife and my brother’s wife. My brother is now ready to retire and as a result he and his wife are looking to exit the 50/50 partnership. My wife and I are considering our options. One option is that we would ownership of the entire property using a quit claim deed but our search for “costs” associated with using this deed are difficult to find.

In one of your earlier columns, you mention a “warranty or quit claim deed.” Is there a difference between the two and which is our better course of action should we choose to purchase the outstanding 50 percent? And, what would be the costs associated with this type of transaction?

Warranty or Quit Claim Deed?

A: You shouldn’t have much issue transferring one couple’s ownership interest in the home to the other using a quitclaim deed or a warranty deed. Either document will accomplish the same thing.

That is to say, the seller will transfer to the buyer the seller’s ownership interest in the home with either kind of deed. However, a warranty deed gives the buyer the assurance that the seller is the lawful owner of the property with the right to sell and the quitclaim deed merely tells the buyer that the seller transfers to the buyer whatever interest the seller has in the buyer — and the seller may not have any interest in the property. (As in, “Have I got a bridge for you…”)

Thus for practical purposes, your brother and his wife can use either form to transfer their interest to you. Over the years, we’ve come to see a slight benefit in using a warranty deed when transferring title between family members. Usually when you’ve purchased the home, you’ve also received a title insurance policy. The title insurance policy gives the buyer protections in case the prior owner wasn’t the rightful owner of the property or the prior owner had liens that could come back and haunt the new buyer.

These protections, along with others, give a buyer some peace of mind when buying real estate from a stranger. Down the line, when you sell the property to a family member, that family member may or may not have those protections under the title insurance policy. The policy generally protects only the named person in the policy. Due to a technical issue, when you transfer title using a quitclaim deed, the buyer could sue you for a title issue but only if conveyed title via a warranty deed would your buyer get any benefit of that original title insurance policy.

Warranty Deeds Edge Out Quit Claim Deeds

It’s a technicality (and a bit too much to go into in this column), but worth noting that a warranty deed would be a tad better to use than a quitclaim deed. Furthermore, in some locations, the recorder of deeds or other office that accepts real estate documents for filing will not accept quitclaim deeds.

Here’s something we’re wondering about: If none of you are U.S. citizens or residents and do not have U.S. Social Security numbers, will you have an issue when it comes time to sell?

You should know that when you buy out your relatives’ interest in the property, you might become liable for any federal income taxes owed by your relatives. A federal law from about 50 years ago requires a seller to tell a buyer whether the seller is subject to federal tax withholding on the sale of real estate. If a seller is a citizen or legal resident in the United States, the seller could and should give an affidavit to the buyer stating that the seller is not subject to tax withholding on the sale of real estate and that the seller is not a nonresident alien for purposes of U.S. income taxation.

For many homebuyers buying a home that costs $300,000 or less, they don’t need to worry about this law. But all other buyers do need to worry. Otherwise, if the seller is subject to withholding and fails to pay the IRS what is due, the buyer would end up on the hook for that money owed.

When structuring the transaction, make sure that your in-laws either have U.S. Social Security numbers or that they are exempt from the withholding requirement. Otherwise, you will need to withhold money and send that withholding to the IRS.

Whether You Use a Warranty Deed or Quit Claim Deed, There Will Be Fees

If you were simply buying a property without a lender, you’d probably end up paying fees to record the deed, any transfer taxes that a buyer might pay in location in which the property is located. When you use a settlement or escrow agent, you also have all or a portion of that fee and a fee for the title insurance policy, if you decide to get one. Some municipalities require inspections of homes that are to be sold and there may be a fee for that as well. If you live in an area where septic tanks and water wells are prevalent, you may also find fees to pay for those inspections, as they may be required under local laws.

For specific fees and costs we’d have to suggest you talk to a real estate attorney or settlement agent where the property is located. That attorney may have a simple method for helping you transfer title between the four of you, and you should also make sure to bring up the question of whether your in-laws are subject to the withholding rules. We’re not punting on your question about cost but some attorneys will charge by the hour and some will give you a flat fee, particularly if you need to rebuy title insurance (we hope you don’t have to). All of this varies based on location, which you didn’t provide in your letter.

Good luck.