Taking the “Quick” Out of Quit Claim Deeds

The Florida case of Dingle v. Dellinger serves as an important warning to attorneys and real estate professionals involved in preparing deeds. The case demonstrates that third party liability may exist when a deed fails to accomplish its intended purpose, even when the harmed party was not the attorney’s client. In that case, an attorney drafted a deed that was ultimately determined to be invalid. Although the grantees were not in privity of contract with the attorney, the court found they were intended third party beneficiaries and allowed a negligence claim to proceed.

The lesson is clear. When transferring ownership interests in real property, a deed that appears simple on its face can carry serious legal consequences. Both grantors and grantees may suffer harm if the deed is improperly drafted, and liability may extend beyond the immediate client relationship.

This article addresses the many considerations that arise when an interest in real property is transferred for less than full value, particularly in transactions that are not arm’s length sales to unrelated third parties. Each situation is unique, and these issues should always be reviewed with a qualified Florida attorney.

Documentary Stamp Taxes

Documentary stamp taxes must be analyzed in every transaction involving a change in ownership. The tax is based on the consideration paid. Even transfers between spouses, transfers to trusts, or transfers to entities may be taxable if there is an existing mortgage on the property. If money changes hands in any form, documentary stamp taxes may be due.

When property is subject to a mortgage, documentary stamp taxes are generally calculated based on the outstanding mortgage balance. The tax rate is seventy cents for each one hundred dollars of consideration. Failure to properly analyze consideration and mortgage balances can result in unexpected tax liability.

Capital Gains Tax Considerations

A transfer of property subject to a mortgage may be treated as a sale for federal income tax purposes. If the debt assumed by the transferee exceeds the transferor’s adjusted basis in the property, a taxable gain may be triggered.

Lifetime gifts of real property generally carry the donor’s basis to the recipient, which can result in higher capital gains taxes upon sale. In contrast, property inherited at death typically receives a step up in basis. As a result, gifting property during life may create greater income tax exposure than transferring property at death.

Adding another owner to title may also affect eligibility for the capital gains exclusion on the sale of a primary residence. Each owner must independently qualify for the exclusion as to their share.

The Save Our Homes Cap

The Save Our Homes cap limits annual increases in assessed value for homestead property. Certain ownership transfers may preserve the cap, such as transfers between spouses, transfers to revocable trusts, or transfers where the owner retains a life estate.

Other transfers may result in the loss of cap protection, including the removal of a non spouse joint owner or the death of a joint owner who was the qualifying homestead owner. The cap may apply only to the portion of the property owned by individuals who qualify for homestead.

Homestead Tax Exemption

Florida law provides a homestead tax exemption for qualifying property owners. When there are multiple owners, the exemption applies only to the share owned by those who actually qualify. Changes in ownership can result in partial or complete loss of the exemption depending on how the transfer is structured.

Gift Tax Issues

When property is transferred for less than full value, a gift may occur. Gifts exceeding the annual exclusion amount must be reported to the IRS. While gift tax is not owed until lifetime exclusion limits are exceeded, large property transfers can still affect future estate tax planning.

Transfers that reserve a life estate may not constitute a completed gift for tax purposes and may still be included in the transferor’s taxable estate.

Estate and Generation Skipping Tax Implications

Lifetime gifts reduce the available estate tax exemption. Transfers to grandchildren or younger generations may also trigger generation skipping transfer tax concerns, which carry their own reporting and exemption requirements.

Transfers Involving Non Citizens

Transfers to non citizen spouses or owners raise additional tax and estate planning issues. The unlimited marital deduction does not apply, and lower exclusion thresholds may apply. Upon death, non resident alien estates are subject to significantly lower estate tax exemptions.

FIRPTA Considerations

Sales involving non citizen owners may trigger withholding requirements under the Foreign Investment in Real Property Tax Act. Even owners who did not contribute purchase funds may be subject to withholding upon sale.

Probate and Title Issues

Improperly drafted deeds may fail to avoid probate and may create title defects. Florida homestead restrictions, spousal rights, and minor child protections must be carefully considered. Joint ownership may pass by operation of law but does not eliminate all probate or elective share concerns.

Challenges to Lifetime Transfers

Lifetime transfers may still be challenged based on undue influence, incapacity, fraudulent conveyance claims, creditor rights, or violations of constitutional homestead protections. Deeds that disinherit protected parties may later be invalidated.

Creditor and Association Risks

Adding owners to title can expose property to the creditors of the new owner. Judgments, liens, divorce proceedings, and business liabilities may attach to ownership interests. Community associations may impose approval requirements or ownership restrictions that must be followed to avoid invalid transfers.

Medicaid Planning Considerations

Medicaid eligibility rules impose a five year look back period for asset transfers. Improper gifting of property can disqualify applicants from benefits. Transfers between spouses or deeds reserving life estates may be treated differently under Medicaid regulations.

Mortgage and Title Insurance Risks

Many mortgages contain due on sale clauses that may be triggered by changes in ownership. Reverse mortgages are particularly sensitive to ownership changes. Existing title insurance policies often do not protect new owners unless coverage is properly extended.

Loss of Control

Once ownership is shared, control over the property is shared. Each owner may have the right to sell or encumber their interest. Joint ownership agreements may be advisable to define rights, responsibilities, and financial contributions.

Conclusion

What appears to be a simple quit claim deed often involves complex tax, estate, title, creditor, and constitutional issues. A Florida real estate attorney should always be consulted before transferring ownership interests in real property. Just as a physician examines a patient before prescribing treatment, a lawyer must fully evaluate the client’s circumstances before preparing a deed.

Source: Barnes Walker Educational Series