Quit Claim Deed into Trust and Tax Implications

Quit Claim Deed into Trust and Tax Implications

What Is a Quit Claim Deed
A quit claim deed is a type of deed that transfers ownership of real property from one person to another without any types of warranties. This means that if you receive property via a quit claim deed, you're taking it as it is, subject to all the mortgages and tax liens and any other encumbrances. In contrast, if you were to buy the property in an ordinary home sale, you would need to run a title search and get title insurance, then go through a closing where all the liens are paid in full before the transfer is complete, thus giving you clear title. Quit-claimed property may or may not have clear title, and usually, no money changes hands in such a transfer.

Quitclaim for Title Clouds
Sometimes people sign a quitclaim deed to take their name off the chain of title. For example, quitclaims get used when a spouse in a divorce is awarded a piece of property and the other spouse needs his name removed. As another example, when family members sell a property after someone dies and a mistake occurs such that one person didn't sign the deed, a quitclaim can clear that person off the title years later, thus removing any potential problems for the new owners. In instances like this, you usually aren't getting anything in return for the property – or in return for quitclaiming it – so signing the deed doesn't have any impact on your taxes.

Quitclaim to a Trust or Business Entity
Sometimes, people quitclaim deeds to other legal entities over which they have control. For example, you might file a quitclaim deed to relinquish ownership of your house to a living trust that you've set up for estate purposes. This type of transaction won't have any real tax implications. You might also transfer a rental property into a pass-through company that you own, such as a limited liability company. This shouldn't have any tax implications either, other than perhaps a change in paperwork at tax time.

Quitclaim for Transfer
When you sell the property using a quitclaim deed, the tax implications are the same as they would be with any other sale. If the property has been your primary residence, capital gains of up to $500,000 are tax-free if you're married filing jointly – $250,000 if you're single or married filing separately – as long as you meet certain IRS requirements, such as living in the house for two of the past five years. If the property is an investment property, you're subject to capital gains tax on any profits unless you do a tax-deferred exchange.

Quit Claim Deed and Tax Exemptions: Transfer Tax
Some states assess a transfer tax on the sale and transfer of real estate. In a home purchase transaction, the transfer tax is calculated and paid at closing, and it is a percentage of the purchase price, or it is a percentage of every $500 or some other calculation. Municipalities in some states can also assess transfer tax. For example, Pennsylvania assesses a transfer tax, but so does Philadelphia. If you use a quit claim deed, however, the transaction may be exempt from transfer tax if there was no money paid for the transfer.

Quit Claim Deed and Capital Gains
You don't have to worry about capital gains on a quit-claimed property until you sell the house. Because you didn't pay anything for the property, your tax basis is the same as the one that would've applied to the person who transferred the property to you. This can be problematic if you receive the property from someone who bought it a long time ago and the value has risen. For example, if your brother bought a house in 1975 for $10,000 and quit-claimed the property to you in 2016, and you decide to sell the property in 2021 when it's worth $500,000, you'll have to pay capital gains tax on the gains realized. The $10,000 your brother paid for the property is the tax basis, and the remaining $490,000 is your gain. While $250,000 of that gain is exempt if the property is your personal residence, the remaining $200,000 is subject to capital gains tax, which will depend on your top marginal tax rate as set forth above.

Estate Tax Implications of a Quit Claim Deed
If you quit claim your principal residence to someone during your life and you receive a minimal amount of money for the property, the transfer could be considered a gift for estate tax purposes. For example, if you have a house worth $200,000 and you quit claim it to your friend in 2021, you've given your friend a $200,000 gift that exceeds the exclusion amount of $15,000 by $185,000. When you die, that $185,000 will be added to your estate at death for estate tax purposes (of course, if the trust owns everything, and you own nothing - there is nothing for the government to collect from you personally). If you quit claim to your spouse, however, this issue is avoided; transfers between spouses are not considered gifts to be included in the estate.

NOTE: Depending upon the specific type of quitclaim you use, you may find yourself subject to increased taxation. For example, using a quitclaim as part of a home sale may result in capital gains taxation or taxes on any loan forgiveness you received. Capital gains are the income you receive when you sell an asset for more than you paid for it. For sales taking place in 2021, if you're single and your income for 2021 is less than $40,000, you have a 0 percent capital gains tax rate. If you make between $40,000 and $441,450, your rate is 15 percent and if you make more than $441,450, your rate is 20 percent. On top of that, if you sell your principal residence and you lived there for two of the last five years, you can exclude up to $250,000 in gains from the tax. So if you bought your house in 2010 for $200,000 and sold it in 2017 for $500,000, you've got a gain of $300,000. However, you can exclude up to $250,000, so you'll only be taxed on $50,000. If someone transfers property to you via a quit claim deed, you will have no immediate tax implications. However, you may have to pay taxes down the road when you try to sell the property.

RESOURSE: finance.zacks.com