Q: I bought a property for my niece some time ago. I paid for it with cash, and she was paying me back in monthly payments. It’s time to give her ownership of the property.
I have not reported these payments as income because she was repaying me for what I paid for the property. When I give her title to the property, will there be issues with taxes? Can I use a quitclaim deed?
A: The easy answer on how to transfer title to your niece would be to convey it to her by warranty or quitclaim deed. Either document would do the trick. A quitclaim deed transfers whatever interest you might have in a property. A warranty deed, on the other hand, affirmatively states that you have an interest in a property and you are transferring that interest.
Whatever deed you decide to use, you’ll need to abide by the local requirements for recording or filing a real estate document. You may have to have a municipal government inspection of the property done before the transfer. You might have to obtain a certificate that shows you’ve paid all fees to the local government agencies. You may even have to pay a fee to be allowed to record the deed. Then, when you are at the recorder or filing office, you will probably face another fee to record or file the document.
Now that you know that you can use either form of document, the question you should be asking is: What is the best way to handle the ownership and payment? If your niece paid you back principal and interest on your loan to her, you should have declared the interest payments as income. If you were trying to be generous and didn’t charge interest, the IRS would deem you to have given her a gift of the amount of interest she should have paid.
Given that people have been able to give each other annual gifts of cash in excess of $10,000 for some time (today, the limit is $15,000), you probably have no federal income tax or gift tax issues to deal with. If you give someone a gift that is above the annual gift limit, you would need to file certain additional tax forms with the IRS.
We don’t know whether you or your niece paid the property taxes on the home and whether you or she claimed a deduction on your or her federal income taxes, but you can usually deduct payments for real estate taxes if you own the property. Here again, depending on whether you or your niece itemize your deductions on your federal income taxes, you could have an issue. If the real estate taxes are low and neither of you itemize, it wouldn’t matter for either of you.
We point out these federal tax issues to you because if your niece took deductions for taxes, she might not have been entitled to take them, as title was not in her name. Likewise, if you took a deduction for the real estate taxes on the home, you might have not been entitled to take that deduction.
Finally, if you are not making a profit in the transfer of title of the home from you to her, you should not have any federal income taxes to pay. Those taxes would only kick in if you make money from the transaction. Make sure you keep your paperwork on what you paid for the property and what your niece paid you back. If you paid $100,000 for the property, you should have paperwork to show that she repaid you $100,000.
One last thought: In some states, your transaction could be taxable for real estate transfer tax purposes. Some places would consider your first purchase yours and your transfer to your niece as a second transfer. The first one may have been $100,000, and transfer taxes would have been paid at that time; when you transfer title to your niece, you, too, would pay transfer taxes. Your niece would have paid you $100,000 for the home.
For more details, please consult with a local real estate attorney and your local municipality.
Ilyce Glink‘s latest book “100 Questions Every First-Time Home Buyer Should Ask, 4th edition,” will be published in mid-February. She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.