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.

Quitclaim Deed

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.

Joint Ownership

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.

Significance

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.