A Real Estate Investor’s Guide to Tax Implications
When transferring real estate ownership, a quitclaim deed is often seen as a tool to pass property between family members, remove a former spouse from the title, or move property into a trust or legal entity. But many investment property owners rightly ask: Does signing or receiving a quitclaim deed trigger capital gains tax?
The answer depends on several key factors, including the nature of the transaction, whether money was exchanged, and what the receiving party does with the property. Below, we break down how capital gains taxes relate to quitclaim deeds—and when investors should pay attention.
A quitclaim deed transfers a property owner’s interest in a property to another party without guaranteeing title or ownership rights. It’s often used between trusted parties such as relatives, spouses, or partners because it offers no warranties that the property is free of liens or claims.
Importantly, a quitclaim deed is a transfer of title, not a sale in the traditional sense. But even without a formal sale, there can still be tax consequences. Recipients assume any existing liens or encumbrances, as quitclaims offer no protection against title defects. Additionally, if the transfer isn't a bona fide sale, the IRS may treat it as a gift—leading to gift tax and basis carryover implications.
Capital gains taxes are not triggered at the time of transfer if the transfer is truly a gift—such as a parent quitclaiming a rental property to a child. However, the recipient inherits the original cost basis of the giver. That means any future capital gain will be based on the donor’s basis, not the market value at transfer.
Similarly, quitclaiming property between spouses (or as part of a divorce settlement) typically doesn’t trigger capital gains taxes, thanks to IRS rules on tax-free transfers between spouses.
If the quitclaim deed is part of a sale, meaning the recipient gives something of value in return, it may be treated as a taxable event. In that case, the original owner may owe capital gains tax if the property has appreciated beyond their adjusted basis.
For example, capital gains tax may apply if an investor quitclaims a property to a partner in exchange for a payment or if a quitclaimed property is later sold and the IRS determines the transfer was part of a transaction rather than a gift. A subsequent sale after a quitclaim gift may also result in a gain based on the original basis
If the transferred property was used for investment or rental purposes, the IRS may require depreciation recapture upon sale. The new owner inherits the cost basis and the depreciation history, which may affect future tax calculations—typically taxed at a maximum rate of 25%.
A quitclaim deed may not trigger an immediate tax liability—but it also does not necessarily eliminate tax obligations. While many transfers are non-taxable, capital gains may come into play when the recipient sells the property. For investment property owners, it’s important to understand how basis, appreciation, and ownership structure impact future tax obligations.
Before executing a quitclaim deed, consult a qualified tax advisor or estate planning professional to ensure the transfer aligns with your overall financial and tax strategy.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.