Reverse Quit Claim Deed

[chgobetty]

Case: In 1995, an elderly parent transfers his/her home via a quit claim deed to the adult child. Now they want to reverse it for fear of huge capital gains taxes, per their CPA. The home has been paid for prior to the deed. The parent has and still lives in the home. No other changes have been made.

Question: Can they reverse the deed without any tax or legal implications? How should they do it? Can they use the same lawyer who processed the deed initially? What's the safest and most legal means?

 

[dmode101]

There are some real problems here. If you are talking about capital gains taxes then I'm assuming the house is quite valuable. The exclusion for capital gains is $250,000 for individual and $500,000 for couple.

But, more importantly, the original deed to the child was a taxable gift for gift tax purposes -- no tax would be due if exemption is still left but it would use some of the parents exemption. However, if the parent had an agreement to remain living in the house, there is a possibility thta the house would still be included in parent's estate as a transfer with a retained interest (IRC 2036). If it is deeded back, it would then be a taxable gift from child to parent and again would be in parent's estate. Has the home really appreciated enough to be worried about capital gains? This is a complicated situation and you need to consider estate and gift tax consequences as well as capital gains issues.

------------------
Jeffrey R. Gottlieb, Attorney at Law
http://www.illinoisestateplan.com
This response is not legal advice and does not create an attorney-client relationship.

 

[chgobetty]

The house was bought for about $90k, now worth $250k. When the house was transferred to the adult child, does he/she need to pay any capital gains tax? Did it need to be reported to the IRS on the parent or child's income tax return for that year? It never was, so do we need to report it?

You write that the exclusion for capital gains is $250,000 for individual and $500,000 for couple. Does this mean the new owner, who is married, is exempt from capital gains tax if the house is worth less than $500k? Or does it mean the couple is exempt from capital gains tax if their combined worth is less than $500k?

If it is deeded back, is the child responsible for any tax and/or reporting to the IRS?

If it is left as is (house now in child's ownership), do we need to do anything?

THANK YOU FOR YOUR GENEROUS ADVICE.

 

[dmode101]

Far be it for me to question a CPA, but $160k of appreciation on a primary residence should not cause any capital gains taxes. Depending on the total value of mom's estate, the real concern should be estate and gift taxes.

There is a real possibility that when a parents gifts a residence and continues to live there, it could subject to both gift and estate taxation. That would not be a good result.

As for your question, capital gains taxes only applies to sales...the transfer to the child was a 'gift' (I'm assuming from your question that child didn't buy the house). The gift *should have* been reported on a gift tax return (Form 709), and assuming that is the only taxable gift made, no tax would be payable -- it would only go to reduce mom's lifetime exemption (which is currently $675,000).

In sum, capital gains taxes is not the main concern. Depending on what else your mom owns, including life insurance, she should consider doing some estate planning.

------------------
Jeffrey R. Gottlieb, Attorney at Law
http://www.illinoisestateplan.com
This response is not legal advice and does not create an attorney-client relationship.

 

[chgobetty]

I really appreciate your free advice and have one more inquiry. You state that capital gains tax would apply to "sales" - you mean when/if the child sells the house? That's what we are concerned about. If the child sells the house, are we liable for capital gains tax? On how much? Would it be the sale cost less the original purchase price ($90k) X capital gains tax? Or would it be the cost of the house at the time of the quit claim deed ($190k) less the final sale cost X capital gains tax?

The parents' assets does not exceed $650k, so we are okay with the exemption allowance.

On another thought, should the parent have just let the house remain in his/her name and the child would have inherited the house anyway? I think the real reason the parent gifted the home to the child in the first place was to try to bypass possibly losing the house should the parent have been incapacitated for an unknown length of time.

Thank you for all your help.