Effects of a Quitclaim Deed on Cost Basis
When you sell a house, your taxable gain is the home's sale price minus its "basis." If you bought the house, the basis is usually what you paid for it, with a few adjustments -- hence the term "cost basis." If you inherit the house or receive it as a gift, you have to measure your basis differently. A quitclaim deed is a common tool for transferring title when no money changes hands.
When a property owner signs a quitclaim deed, she gives up any claim on the property. Unlike warranty and grant deeds, the grantor -- or deed maker -- has no legal liability if title problems emerge later. Because of the lack of liability, homebuyers usually insist on warranty deeds. Grantors use quitclaim deeds to transfer title as a gift, remove an ex-spouse's name from the title or add a family member as a co-owner, for instance.
If your father decides to give you title to his house or to make you a co-owner, he'll probably use a quitclaim deed. The effect is that his cost basis becomes your cost basis. If, say, his cost basis is the $150,000 purchase price, that becomes your cost basis when he gives you the title. Using a quitclaim deed doesn't affect the cost basis; it's getting the house as a gift that does it. If your father used a warranty deed instead, you would have the same basis.
If you live in the house until you die, the cost basis doesn't matter. It matters a great deal if you sell the house. For example, if your mother gives you a house with a cost basis of $100,000 and you sell it for $250,000, that's $150,000 in gain that is taxable. If you live in the house for at least two of the five years before you sell, you can exclude up to $250,000 in gain from the tax. Otherwise, it's usually all taxable.
Things to Consider
Giving away the house is a way to keep it from going through probate. From a tax perspective, though, it's not the best option. If you inherit a house instead of getting it with a quitclaim deed, your basis in the property is "stepped up": It's based on what the house is worth at the time the owner died. If the $100,000 house is worth $250,000 when you inherit it and you sell it for $250,000, you have no taxable gain.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.