If you are trying to refinance by using a quit claim deed, you should consider whether inheriting the property would be a better option.
Q: We prepared and filed a quitclaim deed transferring my father’s house to me so we could refinance to get some cash for my father from the equity of the home. My father did not qualify for refinancing and had lots of medical expenses.
After we transferred the title, we realized that we would have to pay capital gains taxes based on the price he purchased the home for many years ago. There was an addition put on the home and I can’t find any records to support how much he paid for the addition.
How do we determine the value? While we were considering reversing the quitclaim deed, my father passed away unexpectedly. We came across another quitclaim deed claim that was prepared by his estate planning attorney transferring his home to the trust. The deed was signed and notarized but never recorded. Can that deed now be filed or would it be considered invalid because the home is now it my name. The mortgage is still in my father’s name.
A: First, we’re sorry for your loss and hope that you’ve reviewed your situation and have decided to hire an accountant or other estate-planning professional to help you through your scenario.
We’ve written about this topic for quite some time. At least for now, when you are given title to a home by gift, your basis in that home is the same basis that the person had that gave you the home. That is to say, if your father purchased a home many years ago for $25,000 and put $50,000 into the home by replacing the roof and making other capital improvements, the basis – or general cost to you – would be $75,000. If you own the home for at least one year and sell it for $275,000, you’d have a profit of $200,000 and would have to pay capital gains taxes on that amount.
If you had inherited the home at the time of your father’s death, you would receive a stepped-up basis for the home. The stepped-up basis would be approximately the value of the home at the time of your dad’s death. In this instance, if you sold the home shortly after your father’s death, you’d probably pay no federal income taxes from the sale. Since your basis, or cost for the home, would be the same as the sales price for the home, you wouldn’t be required to pay any federal income taxes on that sale.
As you are seeing, you get a better deal with the IRS by inheriting real estate than receiving that property as a gift while the person is alive. There are certain cases where it won’t matter if you received the property as a gift or inherited it. These cases usually relate to homes that have gone down in value or have the same approximate value or where the owners of the home poured quite a bit of money into the homes and their values approximate the sales price for the homes.
But where you have significant appreciation in the value of a home, you generally will want to inherit the home over receiving the home as a gift. Now, if you plan to live in the home as your primary residence and live there for at least two years, the home would become your primary residence and you’d be able to exclude from federal income tax up to $250,000 in profits (or, $500,000 in profits if you are married).
A word of caution: with the flux in Washington over the deficit and the national debt, the federal income tax code can change at any time. So, if you are planning any real estate purchases or sales and are relying on information you have known to be true for some time, you should double check to make sure Congress hasn’t made any changes to the tax laws that would affect you.
Having said all that, we need to talk about the specifics of your question. In answer to your question about using the unrecorded quitclaim deed, you probably will have trouble trying to claim that the deed is now valid and the deed given to you and recorded is invalid. Unfortunately, your father may have had an estate plan in place and wanted to have his home transferred into a living trust. At his death, that trust would have owned the property and the trust would have designated who the beneficiaries would have been under the trust.
However, your dad never had that deed recorded and his wishes to have that deed recorded would be ambiguous at best, particularly as he proceeded to transfer ownership of the home directly to you before his death. Unless you have other information that might assist you in voiding the transfer to you, you’re probably going to have to assume that you now own the home.
In trying to figure out the basis (or cost) of the home, you can add in all of the capital expenses made to the home. You know that your father built an addition to the home. You probably also know that your father replaced the roof, installed new fixtures and probably made other long-term improvements to the home.
You indicated that you don’t have first-hand knowledge of the cost of these improvements. To avoid paying federal income taxes on the sale, you’re going to have to get documentation together to substantiate the improvements made to the home. The IRS requires paperwork to substantiate your claim for the basis of the home. (You can get more information from the many publications offered on the IRS website, such as Publication 527, 530 and 551.)
You might have to go through your father’s records to see if you can find cancelled checks, contracts for work that was done on the home or any other documentation that can assist you in verifying the basis of the home.
Regarding questions refinancing with quit claim deed. Can my the payoff amount for my fathers mortgage be added to the cost basis?
No. Paying off a mortgage is not related to the value of the property nor is it related to what the property cost. If you buy a property for $100,000 and add $50,000 of improvements, your basis should be around $150,000. You may have a $20,000 or $130,000 mortgage on that home, but paying off that mortgage should not affect your cost basis for the home.