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The vast majority of real property deeds are warranty deeds, which warrant—or assure—that no one else can register a claim on the given property. The title search and title insurance requirements for mortgage transactions provide verification for this claim.
However, an alternate type of deed known as a quitclaim deed provides no warranty of any sort. The quitclaim deed is a transfer of any interest in the property to another person without warranty, thus earning these deeds the nickname “deed of release”. Of course, there is an assumption that the seller of the property actually owns the property and has clear title—but there is no mechanism that guarantees it.
In cases like this, there is no sale (exchange of funds) and no corresponding title search and title insurance. Why would anyone want to do this? There are several logical reasons (as well as a few bad ones).
►Living Trust: Transferring property to a living trust is one reason – you already know the claim history and have the information from the previous title search and insurance when you purchased the home. You can use the same strategy to move properties into an LLC, S-Corp, or similar entity, but the risk of a claim is increased in those cases.
►Transfer Within a Family: Quitclaim deeds are sometimes used to transfer ownership of a home within a family without money changing hands.
►Clearing a Title: Situations where there is an issue with a title, such as the aftereffects of divorce proceedings, may require a quitclaim deed to clear the title of any potential claim before a sale can proceed. Another example is a loan that was paid-off but not properly released by the lender.
►Government Transfer: In cases where a property is foreclosed and sold by the government to recover unpaid taxes, the buyer receives a quitclaim deed. Essentially, the government is only caretaking the property in the short term—it is up to the buyer to investigate and clear any title issues associated with the auctioned property.
►Mutual Consent in Divorce: Occasionally, one party to a divorce releases interest in a given property that was previously owned by the couple. This typically occurs as part of the broader agreement to distribute community property (i.e., one party might keep the main home and one might keep the vacation home). In such cases, quitclaims are executed as elements of the broader divorce agreement.
It is very difficult, if not impossible to reverse a quitclaim deed. Either the quitclaim has to be voluntarily rescinded (to formally quitclaim the property back to the original owner) or invalidated through proof of extraordinary circumstances such as being forced to sign under duress.
State requirements vary, but at minimum the deed requires the names of the grantor and grantee, the legal property description, county name, recording of any funds that may change hands or a token dollar value if gifted, signature of the grantor (and sometimes the grantee), and notarization of the document. The document is filed with the entity responsible for land records, typically a county recorder or assessor’s office, to complete the transfer.
A quitclaim deed does not negate unpaid taxes. If back taxes are owed on the property, the tax jurisdiction may place a claim to the property and the quitclaim deed can be negated. Once the claim is accepted, it is up to the grantee to promptly deal with any back taxes to avoid a claim.
Since the property is generally gifted, gift tax rules apply with respect to the value of the home. However, the quitclaim deed is not taxable in cases where ownership is transferred to a spouse, or if the property is being transferred to a qualified charity per IRS rules.
With few exceptions, such as the government transfer case, there is no reason that you cannot use a warranty deed in any situation where you can use a quitclaim deed. You are making a tradeoff in the time and cost involved in getting a warranty deed versus the risk involved in re-establishing future title and fending off any claims to your property. Sometimes that is a reasonable decision – but you must understand the risk and ramifications involved in using quitclaim deeds.
Michael Dubrow is a serial entrepreneur who has co-founded numerous successful businesses. As a principal at MoneyTips.com, he's responsible for the personal financial community's content strategy. Michael also provides strategic, marketing and business development consulting to Estalea's portfolio companies. Previously, Michael was the founder and CEO of Dubrow Marketing Associates and co-founder of Bargain Network Inc., inQ (now TouchCommerce.com) and two institutional investment firms.