Can I quitclaim deed the land my deceased parents left me?
Avoiding Probate with a Quitclaim Deed
When a person dies and does not have a surviving spouse, the passing of that decedent's property to surviving children or other individuals occurs through a process known as probate. Given the cost of probate, it is common for individuals to seek methods to avoid probate. This leads to one of the most common questions about avoiding probate: can someone use a quitclaim deed to avoid probate?
The following article provides an overview of probate and whether or not a quitclaim deed can be used to avoid the costs associated with probate.
What is probate and why is it so expensive?
Probate is a legal process where a court, known as a probate court, reviews applicable legal documents and the governing laws of the state where the decedent lived to determine who should receive the decedent's property. Probate takes place whether the decedent had a will or not.
In probate cases where the decedent had a properly executed will, known as testate, the will governs the distribution of the decedent's property. Where the decedent did not have a will, which is known as intestate, state laws determine how the property is distributed.
Because the distribution of property can be complicated, the probate court typically appoints an executor to carry out the distribution according to the will or applicable state laws. The executor is empowered to take the necessary steps, including selling certain property such as real estate to convert it into a liquid asset, to complete the distribution.
Even in cases where the decedent has a will, the complicated nature of probate can make it an expensive process. Probate requires involvement of attorneys, an executor, accountants, and other individuals, as well as the payment of various filing fees. Generally, the more property a decedent has, the more expensive the probate will cost. Even the simplest probate can typically cost over $1,000.
Can someone use a quitclaim deed to avoid probate?
Whether a quitclaim deed can be used to avoid probate depends on when the quitclaim deed was created, when it was filed, and the governing laws of the decedent's state.
A quitclaim deed is a legal method of transferring ownership of real property from one person to another. The quitclaim deed simply states that the individual is giving up their rights to the property and is transferring those rights to another individual.
For a quitclaim deed to be executed fully, it typically must be documented in writing, describe the concerned property fully, and be filed with the appropriate recording office. Creating and filing a quitclaim deed is relatively inexpensive, costing only the amount of a small recording fee.
If a quitclaim deed was created before the death of a decedent but was not filed until after the death of the decedent, some states will still consider it a validly executed transfer. However, other states require that a quitclaim deed be filed before they consider it valid. Therefore, a quitclaim deed filed after someone's death may not be considered a valid transfer of real property.
In addition, while a quitclaim deed indicates the owner of property is giving up their rights to the property, it does not guarantee that another individual does not have a right to the property. If the owner of a property created more than one quitclaim deed transferring the rights to a property to different individuals, the holder of the deed that is filed first becomes the owner of the property, regardless of the order in which the quitclaim deeds were actually created.
Given that a quitclaim deed does not warranty that no one else holds a right to a property, especially in cases where the deed is not filed until after the decedent's death, real property transferred through a quitclaim deed may still have to go through probate to confirm the validity of ownership.
While a probate court and executor can ultimately choose to use a quitclaim deed to transfer property according to a will or the applicable state laws, the property must still go through probate to determine the correct recipient of the property first.
Tax Implications of Using a Quitclaim Deed
Even if someone can execute and file a quitclaim deed to transfer property, they may not want to do so because of the tax implications.
When someone sells real property, that person pays capital gains tax on the amount of the sale above what they paid for the property, or their basis in the property.
When real property is inherited through probate, the value of the property is stepped up from whatever the decedent paid for the property to whatever the property is worth at the time of the transfer. The new owner of the property can now use this stepped up value of the property as their basis in the property when they sell it, thereby avoiding a potentially significant amount of capital gains tax.
However, if a person transfers property using a quitclaim deed, the new owner in the property maintains the basis of the original owner. The new owner will now pay capital gains tax on the difference in the original basis and the sales price.
For example, assume someone purchases real property for $30,000 and it is now worth $330,000. If a new owner inherits the property through a will or based on state laws and sells the property for $350,000, the new owner pays capital gains tax on only $20,000, the difference between the sales price and the value when the new owner received the property.
However, if a new owner receives property through a quitclaim deed and sells the property for $350,000, the new owner pays capital gains tax on $320,000, the difference between the sales price and the amount the previous owner paid for the property.
Given the significant amount of capital gains tax involved for real property that has increased significantly in value, paying the costs associated with probate may be cheaper in the end than using a quitclaim deed in an attempt to avoid probate costs.
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