A quit claim deed (sometimes mistakenly called a "quick claim" deed) is a fast and easy way to transfer title of a house from one person to another without going through a sale process. The tax repercussions of a quit claim deed can fall on both the transferor and the transferee; however, the transferor will have to consider estate taxes, and the transferee may face a shock if he eventually sells the house.
If you quit claim your principal residence to someone else, the value of the home at the time of the gift will go towards your lifetime gift limit for estate tax purposes. If the person to whom you transfer the house later sells the property, she might end up owing a hefty capital gains tax.
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.
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.
Capital Gains Tax
Capital gains are the income you receive when you sell an asset for more than you paid for it. These types of gains are realized on things like the sale of stock, the sale of a vehicle or the sale of a home. The amount you originally paid for the asset is called the tax basis, and it's used to determine the gain from the sale; you deduct the basis from the sale price, and the difference is your gain. If you owned the property for more than one year before you sold it, the gains are considered long-term capital gains; if you owned it for less than a year, the gains are short term. Short-term capital gains are taxed at ordinary income tax rates, while long-term capital gains have their own tax rates that are based upon your top income tax bracket.
For sales taking place in 2018, if you're single and your income for 2018 is less than $38,600, you have a 0 percent capital gains tax rate. If you make between $38,600 and $425,800, your rate is 15 percent and if you make more than $425,800, your rate is 20 percent.
Capital Gains on the Sale of a Home
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.
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 2018 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.
The Federal Estate Tax
Estate tax, also called the gift and estate tax, is a tax assessed on the estate of a deceased person based upon the total value of the estate. Only very large estates must file an estate tax return. To determine whether you have to file a return, you must look not only at the value of assets in the estate at the time of death but also at the gifts the deceased person made during her life. Each year, an individual may gift up to a certain dollar amount to one person, called the exclusion amount, without having to report it for gift tax purposes. In 2018 and 2019, that amount is $15,000. The lifetime exclusion amount for an individual is $11,180,000 if she dies in 2018, and $11,400,000 if she dies in 2019.
To determine the size of the estate, you'll have to figure out whether any gifts to one person by the decedent exceeded the exclusion amount of that year, and then add up all gifts over the person's life, but only to the extent that they exceed the exclusion amount. For example, if your aunt gave you $20,000 in 2018 and gives you $20,000 in 2019, and then dies in 2019 with total assets worth $550,000, you'll have to add $10,000 to the estate's value representing the $5,000 per year she went over the exclusion amount. However, since that amount is still less than the lifetime exclusion amount, her estate will not file a tax return.
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 2018, 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. If you quit claim to your spouse, however, this isn't an issue; transfers between spouses are not considered gifts to be included in the estate.
- The Chicago Tribune: Receiving a House as a Gift May Lead to Hefty Tax Bill
- IRS: Estate Tax
- IRS: Publication 523 (2017), Selling Your Home
- IRS: Topic Number 701 - Sale of Your Home
- Nolo: Avoiding Capital Gains Tax When Selling Your Home: Read the Fine Print
- National Conference of State Legislatures: Real Estate Transfer Tax
- City of Philadelphia: Realty Transfer Tax
- Bankrate: What is the Long-Term Capital Gains Tax?