Question: What are the tax consequences of a quitclaim deed on the recipient? We want to give our house to our youngest daughter and continue living in the house until we die, paying for the property taxes, upkeep, etc., but not owning it any more. How does a quitclaim deed work?
Answer: As its name implies, a quitclaim deed releases any ownership interest you may have in a piece of real property. It is the simplest form of deed. It does not guarantee that you own or did own a particular piece of property, it merely releases your claim to that property. Whereas, a warranty deed guarantees that you own the property to which you are transferring title.
Quitclaim deeds are often used to transfer title of property between family members. But you have to be careful about the state real estate excise tax rules when making the transfer. If there is mortgage debt on the property at the time of the title transfer and the person receiving the property assumes the debt, then excise tax may have to be paid on the balance of the mortgage because you are being relieved of the debt. For example, if your house was worth $300,000 with a $100,000 mortgage balance when the quitclaim deed is recorded, you may have to pay real estate excise tax on that $100,000 debt assumption. I say you “may” have to pay the real estate excise tax because it depends on the local jurisdiction’s rules for title transfers between family members, so check this out before you make the transfer.
Excise tax rates vary from municipality to municipality, ranging from approximately 1.6 percent to 1.8 percent. For example, at an excise tax rate of 1.78 percent, the tax would be $1,780 on a $100,000 debt. Excise tax is paid by the seller of the property. In your case, you would be the seller even if you are giving the property to your daughter for free.
If you own your home free and clear of any mortgages at the time of title transfer, there would be no real estate excise tax due. You can also avoid paying the excise tax by not transferring the debt to your daughter. In other words, you could sign a quitclaim deed giving your daughter title to your house, but if you maintain the responsibility of making the monthly mortgage payments she would not be incurring any debt and would not be subject to the excise tax.
There is no federal capital gains tax liability if the transfer is a gift rather than a sale. Keep in mind that under tax law, you can keep up to $250,000 in home sale profits tax-free ($500,000 for a married couple) even if you sold the home to your daughter for cash.
One common reason to transfer property between relatives is to prevent your heirs from having to paying estate tax upon your death. Under existing tax law, a person can leave up to $3.5 million to his or her heirs without incurring any estate tax. Any assets in excess of the $3.5 million limit are subject to inheritance tax. The $3.5 million limit is per person, so you and your husband could leave a combined estate of up to $7 million before your heirs would be forced to pay any tax.
Many people who have estates in excess of the $7 million limit try to avoid the inheritance tax problem by giving away their property prior to their death. You can give away $13,000 per person, per year without reducing your $3.5 million estate exemption. For example, you could give $13,000 per year to your youngest daughter and your husband could also give her $13,000 per year, for a total of $26,000 per year. Any gifts in excess of that $13,000 limit per year are deducted from your $3.5 million estate exemption. In other words, you’d be able to protect fewer assets from the inheritance tax upon your death if you gave away too many assets today.
Now keep in mind that estate tax rules are very controversial right now in Congress and subject to change. The estate tax is scheduled to be repealed in 2010 and then reinstated in 2011 with the exemption going down to $1 million per person. So it gets confusing and it’s very hard to make long-term plans based on current tax laws because they are subject to change at any time.
If you really want to get sophisticated, you could place your house into a qualified personal residence trust which would give you the right to live in the house for a specific number of years, at the end of which it would become the property of your daughter. There are significant estate planning benefits to such a trust, but they are beyond the scope of this column.
Please keep in mind that I am not a lawyer or an accountant and this column is for general information only. Please consult a tax professional for further advice before taking any actions.
Mail questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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