As real estate professionals, we've all had that phone call. "Hey, I need to transfer some property to my friend, my cousin, my spouse, my buddy, my LLC, my trust, etc., etc. Who can do a quick claim deed for me?"
For starters, it is a "Quit" Claim Deed, not a "Quick" Claim Deed, but that's for another day.
The important thing to take away from this discussion is that what sounds simple almost never is. The facts surrounding a requested conveyance of real property should always be fully analyzed before it is done. This blog article will cover some of the more common issues that come up, but this is by no means a complete explanation of all the problems that could arise from seemingly simple property transfers.
The first complexity of a simple transfer is the applicability of "transfer taxes". Transfer taxes, also known as Documentary Stamp taxes, are due on a conveyance of real property with very few limited exceptions. For example, even a conveyance from one spouse to another will trigger transfer taxes at $0.70 per $100 if the property has a mortgage on it. The most common scenario here is that one spouse owns a property subject to a mortgage, and after the wedding, the spouse wants to add his new wife to the title. Simple enough, and no money is changing hands. This is still a taxable conveyance. Let's say there is a mortgage balance of $200,000 at the time of the deed. The tax would be based on 50% of the balance, or $100,000, meaning the transfer tax would be $700.00!
Second, clients should be aware of "due on sale" clauses of standard mortgages. Every mortgage contains one of these clauses, which obviously states that the full debt of the mortgage loan is due upon a sale of the property. But looking more closely at these clauses, they also typically state that the mortgage debt is due upon any conveyance of title, which would include gifts or even transfers pursuant to a court order, like a divorce decree. Therefore, when a property is encumbered by a mortgage, not only do clients need to verify what transfer taxes may be due, but they must consult with their mortgage lender to verify if the transfer will even be allowed, and what processes and/or fees are involved in getting the transfer approved.
Next, let's address gift tax consequences. Annually, you can gift up to $15,000 without having to file a gift tax return. Gift taxes are not due until the lifetime exemption amount is met, which is currently $11,180,000 at the time of this blog. The transfer of real property to another without financial consideration is a gift. If the value of the interest conveyed is above $15,000, then the transferor will be required to file a gift tax return. Furthermore, if the value of the conveyance results in the transferor's lifetime gifts exceeding $11,180,000, then gift taxes will be due. As a relevant aside, gifts in excess of the annual exclusion also reduce the transferor's lifetime estate tax exemption. Note: the exclusion amounts above are only available to U.S. citizens and resident aliens. If you are working with non-U.S. citizens, proceed with extra caution and I strongly encourage you to recommend the clients speak with a U.S. attorney and accountant before completing any transfer of U.S. real estate.
Finally, let's touch on capital gains taxes. This is a complicated topic, but for now, what should be known is that if a lifetime gift of real property occurs, typically, the value attributed to the gifted property is based on the price for which the transferor/owner bought the property. So if the asset is then sold, the "gain" is the difference between what the original owner bought it for and the sales price. However, if the transfer is one of inheritance after death, as opposed to a lifetime gift, then the inheriting party receives a "stepped-up" basis, receiving credit for the value of the property at the time of death, not the value at the time the deceased owner acquired it. This is significant because typically assets are worth more at death than when first acquired, therefore, lifetime gifts can result in more capital gains tax than inheritance.
In addition to the foregoing, there are many, many other concerns involving "simple deeds" that clients need to be fully aware of before attempting to transfer real property (e.g. Medicaid eligibility, effects on title insurance coverage, probate issues, impact on homestead tax exemptions, etc.). The best advice you can give to a client looking to transfer an interest in real property is to have him/her speak with a licensed Florida real estate attorney.
This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion. The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.