Taking the "Quick" Out of Quitclaim Deeds.

• Author: Hoonhout, Robert A.
• Position: Florida

The recent case of Dingle v. Dellinger, 134 So. 3d 484 (Fla. 5th DCA 2014), should be reviewed by all attorneys who prepare transfer deeds. The case illustrates that third-party liability can exist if the transfer does not effectively serve the third parties' interest as originally intended, even if the third party was not the lawyer's client. In Dingle, the attorney drafted a deed for the client, but the deed was not valid. The grantees filed a suit against the attorney based upon negligence. The grantees were not the attorney's clients, and could not establish privity of contract. The grantors received no consideration for the transfer. The court found the facts alleged were sufficient to establish the narrow exception to the privity requirement because the grantees were intended third-party beneficiaries. The message to be gleaned by real estate practitioners is clear. A drafting attorney must consider many factors and potential consequences when an ownership interest in real property is transferred. Failure to do so can result in a claim by not only the grantor, but also the grantee.

This article discusses some of the considerations that could affect a decision to transfer an interest in real property for less than full value. These considerations generally apply when the transfer is not part of a bona fide sale to a disinterested person in an arm's length transaction. Every situation is different and this discussion should not take the place of a consultation with a qualified Florida attorney.

* Documentary Stamp Taxes--The first issue to consider is documentary stamp taxes and how much is due when there is a change in ownership? The tax is based upon the consideration paid. (1) Even transfers between spouses, transfers to a trust, or transfers to an entity can be subject to tax if there is a mortgage on the property. (2) Also, if money changes hands (including "under the table" money) taxes are due. (3) If the property is subject to a mortgage, documentary stamp taxes are based on the mortgage balance. (4) The tax rate is 70 cents for each $100 of consideration. (5) Thus, documentary stamp taxes are an issue that must be investigated in every transaction involving a change in ownership.

For example, the wife owns a property worth $200,000. The mortgage balance is $100,000. If the wife signs a deed making the husband and wife owners, documentary stamps are based on XA of the mortgage balance. Therefore, $350 in documentary stamp taxes will be due. Thus, one must carefully look for any consideration being paid in these transactions or the lack thereof before completing the preparation, execution, and recording of a quitclaim deed.

* Capital Gains Tax--The second issue one needs to consider is the possibility of capital gains tax being realized upon the gift of encumbered property. As we know, a transfer of property subject to a mortgage can be treated by the Internal Revenue Service (IRS) as a sale. The U.S. Tax Court held that, "[t]o the extent the debt assumed by the transferee exceeds the transferor's adjusted basis in the property, a disposition is deemed to occur, and a corresponding gain must be recognized by the transferor." (6)

There are further complications in this capital gains area. A lifetime gift of an interest in real property causes the donee of the gift to take the basis of the donor in most cases. (7) If the transfer takes place at the death of the owner, the person inheriting has a basis in the amount equal to the value on the date of death. (8) As a result, property inherited in years after 1977 will receive an automatic step-up in basis. A lifetime gift can, therefore, result in more capital gains tax than an inheritance.

The practitioner should also avoid a possible loss of the $250,000 capital gains exemption. (9) If one owner originally owned the property but then adds another to the title, each of the owners would have to qualify for the $250,000 capital gains exemption as to his or her share of the sale proceeds. As Congress looks for ways to balance the federal budget, there is a strong possibility that capital gains could be taxed at the same levels as ordinary income in the future, resulting in tax rates up to 38 percent or more. For highly appreciated property, or property that will appreciate in the future, a gift may have significant income tax consequences at the time of sale for the person receiving the gift.

It is important to note that all attorneys should provide a closing statement and fully comply with federal law in reporting the sale of real property to the IRS. (10) If your firm is told that no funds are exchanged, and the IRS later determines that a sale has occurred, the parties will face substantial penalties for failure to report the transaction.

* The Save Our Homes Cap: Amendment 10--The Amendment 10 cap on increases in assessed value on homestead property is governed by a separate statute. (11) An owner must first qualify for the homestead tax exemption. There are circumstances in which an owner can remain eligible for the homestead tax exemption but lose the benefits of the cap.

F.S. [section]193.155 governs this benefit and provides rules for determining a change in ownership that can cause the loss of cap benefits. As a result of legislation in 2006, an owner can now add one or more persons to the title without losing the Amendment 10 cap, as long as they are both a grantor and a grantee in the instrument transferring ownership. (12)

In other transactions, when there is a transfer of ownership, the cap remains if there is no change in beneficial ownership, such as a transfer from an individual to his or her revocable trust, a transfer is to the owner's spouse or dependent. A transfer to the owner's spouse or children at death is also exempt under art. X, [section]4 of the Constitution and F.S. [section]732.4015. (13) The Save Our Homes Cap should also remain when the transfer is to correct an error in a prior deed, or the owner retains a life estate, giving only a remainder interest to the new owner (traditional...