Learning how the IRS handles these ownership transfers ensures you aren't surprised when you owe the government after giving property to a family member.
- Quitclaim deeds are best used to transfer property between family members
- This transfer is a taxable event in many scenarios
- You can avoid tax when moving property to a spouse
- Capital gains tax could be a factor when selling the property later
A quitclaim deed is a tool a grantor might use to relinquish their interest in a property. However, this deed doesn't guarantee that the grantor owned the property in the first place, so it's typically used in non-sale agreements when the asset is transferred between family members.
Since no money changes hands in many of these scenarios, there is a misconception that quitclaiming isn't taxable. After all, if you aren't buying or selling anything, there's little reason to involve the government. These deeds are usually taxable, though, because the transfer qualifies as a gift under IRS rules.
Learning as much as possible about quitcklaim deeds helps determine if they're the right option for your situation. Are quitclaims taxable? Here's an in-depth answer to that question and information on when you use these documents.
When to use quitclaim deeds
Quitclaim deeds are only helpful in specific situations. The term quitclaim means formally relinquishing a legal claim to a property, so it's only applicable when you wish to quickly hand a home over to someone else.
If you receive a property via a quitclaim deed, you should know there's no protection for you. You're taking the grantor's word for it regarding property ownership, which is why you won't see quitclaim deeds used in property sales very often.
You'd only want to use quitclaim deeds when transferring property between family members, clearing a title defect, or adding a family member to the title. You can also use a quitclaim as part of a divorce settlement because both parties will know there aren't any issues with the title.
It's also worth noting that a quitclaim deed isn't usually practical when there's an outstanding mortgage because the grantor will have to continue making payments after gifting the property.
Quitclaims are typically taxable
In most situations, yes, someone will owe taxes when transferring property with a quitclaim deed. You'll have to report the transfer to the IRS using Form 709, which covers federal gift taxes. The person giving the gift is responsible for paying tax, and the recipient doesn't have to report the gift at all.
There are some exclusions, however. In 2022, one person can gift another person up to $16,000 in cash or assets in a calendar year without paying tax on the gift. A couple can give an individual up to $32,000, so if spouses jointly own a property and want to add a sibling to the title, they can each gift the sibling $32,000 in property value before paying tax. Those numbers will jump to $17,000 and $34,000, respectively, in 2023.
The IRS is particularly interested in scenarios where a parent passes a home or part of a home to their adult children because they realize this situation could be a method of avoiding tax payments on the private sale of a property. Depending on various details, the tax rate on a gift is between 18% and 40%.
You can avoid tax in some scenarios
So, quitclaiming is typically taxable, but this isn't always the case. There are scenarios where you can avoid gift tax, such as bringing a spouse onto the title. In this situation, you aren't necessarily transferring the property or giving up ownership, just adding someone else to legally share the home with you. Handling the transfer in this manner makes it easier to pass full ownership to your spouse if you pass away.
The same goes for a divorce, as you can use a quitclaim deed to remove one spouse from the title while leaving the home to the other spouse. This situation isn't taxable because it's part of the divorce proceedings.
You can use a quitclaim deed to clear up a cloud on a title without dealing with tax implications. For example, if multiple heirs are inheriting a property and one doesn't have any interest in ownership, they can use this process to relinquish their stake without paying tax.
It's possible to donate a property to charity using a quitclaim deed, as well. The donor won't be responsible for gift tax in this situation as long as the charity is tax-exempt.
Capital gains tax
Another aspect worth looking at when it comes to quitclaim deeds is capital gains. Since there's no money changing hands when the property transfers from one person to another, there's no sale price to reflect the home's current market value.
The problem arises later when the person inheriting the property through a quitclaim deed wants to sell the home. The price the house originally sold for will be its tax basis, and capital gains will apply to any appreciation over that amount.
If a parent purchased a home in the 1970s for $30,000, transferred it to a child using a quitclaim deed, and the child sells the property for $400,000 in 2022, the child will be on the hook for capital gains tax on that appreciation.
It's worth noting that leaving your child the home in your last will or through a revocable trust can reduce your heir's tax burden significantly. As a result, these methods are typically preferable if your child doesn't need ownership of the property right away.
Have an attorney write your quitclaim deed document
Getting an attorney to create your quitclaim documents ensures you don't miss any steps and complete everything correctly. All the lawyer needs is information on the grantor, grantee, and property, in addition to the mortgage and sale price, if applicable, to complete the paperwork.
PeytonBolin offers real estate legal assistance in South Florida. We can prepare your quitclaim deed document for you and will ensure you pay all the necessary taxes. Contact PeytonBolin for more information on our quitclaim document services.