Archive for June, 2014

Transferring House Ownership After a Divorce

Monday, June 30th, 2014

One common way to transfer house ownership is with a quitclaim deed, a legal instrument by which the owner of a piece of real property, called the grantor, transfers any interest to a recipient, called the grantee. The owner/grantor terminates (“quits”) any claim to the property and transfers the claim to the recipient/grantee.

The vacating spouse uses the quitclaim deed to “quit,” or give up, all “claims” to, rights in, and ownership of, the marital home. In exchange, the spouse who retains ownership pays “valuable consideration” — money, or an item with monetary value — to the spouse filing the quitclaim. In a divorce, one spouse terminates any interest in the jointly owned marital home, thereby grants the receiving spouse full rights to the property.

For example, when a wife acquires the marital home in a divorce settlement, the husband executes a quitclaim deed eliminating his interest in the property and transferring full claim to the wife quickly and inexpensively.

A quitclaim deed contains no title covenant and offers the grantee no warranty as to the status of the property title. The grantee is entitled only to whatever interest the grantor actually possesses at the time the transfer occurs. In this the grantor does not guarantee that he or she actually owns any interest the property, or if he or she does own an interest, that the title is free and clear. It is therefore possible for a grantee to receive no actual interest, and – because a quitclaim deed offers no warranty – have no legal recourse to recover any losses.

Because of this lack of warranty, quitclaim deeds are most often used to transfer property between family members, as gifts, placing personal property into a business entity (and vice-versa) or in other special or unique circumstances. Quitclaim deeds are rarely used to transfer property from seller to buyer in a traditional property sale; in most cases, the grantor and grantee have an existing relationship, or the grantor and grantee are the same person. Further, if the grantor should acquire the property at a later date, the grantee is not entitled to take possession, because the grantee can only receive the interest the grantor held at the time the transfer occurred. By comparison, other deeds often used for real estate sales (called grant deeds or warranty deeds, depending on the jurisdiction) contain warranties from the grantor to the grantee that the title is clear and/or that the grantor has not placed any encumbrance against the title.

Tax Implications

Tuesday, June 3rd, 2014

Very often the marital home is the most valuable asset a divorcing couple divide, particular since the IRS permits homeowners to exclude from taxes a certain amount of capital gains from the sale of a primary residence. The gain (or loss) is the selling price of the home, minus any selling expenses, minus any adjustments or improvements. Currently, the IRS allows up to $500,000 for couples and $250,000 for individuals in capital gains exemptions.

In order to qualify for the $500,000 cap, the couple files a joint return for the year in question and meets the IRS “own and use test.” If either spouse does not meet the own and use test, then the maximum exclusion allowed would be the amount that each spouse would qualify for if treated separately. To qualify for the maximum exemption, the couple must have owned the house and lived in it and considered it their primary residence in at least two of the previous five years. The couple has three years starting from the due date of their return in the year of the sale to decide whether or not to take this exclusion. To exclude gain under the main home sale rules, a person generally must have owned and lived in the property as his or her main home for at least two years during the five-year period ending on the date of sale. If he or she has two homes and live in both of them, his or her main home is ordinarily the one lived in most of the time.

This exemption can only be claimed once every two years, calculated from the date of the sale, unless the reason for selling a second home within a two-year period is related to health, change of employment or unforeseen circumstances. In this instance, you may still be entitled to claim a reduced exemption.

Moreover, the IRS requires one spouse to have met the own and use test for married couples that file a joint return. This means that if the couple is still legally married and either spouse meets the two-year requirement, then the couple can still qualify for the full $500,000 couples exemption on their joint return.

The IRS “own and use” is satisfied when the spouses legally owned the property and one spouse continues to use the home as his or her primary residence under a divorce decree or legal separation agreement. That means that as long as a person’s remains on the deed and his or her spouse lives in the home, he or she is eligible for the full capital gains tax exemption when the house.