by Robert A. Hoonhout
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 ½ 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. §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, §4 of the Constitution and F.S. §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 life estates or Ladybird Deeds). The Save Our Homes Cap will be lost when one of two nonspouse joint owners, both of whom have applied for and received the homestead exemption, is removed from title. The Save Our Homes Cap will also be lost when one of two unmarried joint owners dies, and both have received the homestead exemption, or the joint owner or life tenant who dies was the one who was eligible for the homestead exemption and the Save Our Homes Cap. Finally, the Save Our Homes Cap will apply only to the share of the owner or owners who reside in the home and qualify for the homestead exemption. The shares of those who do not qualify for the homestead exemption will be increased like any other nonhomestead property.
• The Homestead Tax Exemption — Florida law provides for various homestead tax exemptions, including an exemption for the first $25,000 in value, with a partial exemption for the next $25,000 in value.14 The Florida attorney general has issued an opinion that addresses the inconsistency between the statutes addressing the Save Our Homes Cap and those addressing the ad valorem property tax exemption.15 It is possible to interpret the homestead exemption statutes in a manner that results in a loss of the homestead ad valorem tax exemption when there is a change of ownership, but the change in ownership would be exempt under the Save Our Homes Cap. However, attorney general opinion 2007-08, suggests that the exception in the Save Our Homes Cap statutes does not apply to the general homestead tax exemption. To preserve the homestead tax exemption for the full value of the property, the existing owner must be the only one who claims the homestead exemption before and after the transfer.
When there are multiple owners, the homestead tax exemptions only apply to the share of the owners who qualify. For example, if the property is worth only $50,000 and there are two owners, but only one lives in the home, the exemption only applies to the $25,000 share of the resident owner. Thus, taxes would be lower if both owners made the home their homestead residence.
• Gift Tax Consequences — When property is transferred and the transferor does not receive full value in return, a gift has occurred. There are two exclusion amounts.
Gifts in excess of the annual exclusion amount require filing a gift tax return. The annual exclusion amount allows for gifts to an unlimited number of individuals of up to $14,000 per year.16 Gifts over a year’s time to any individual that exceed $14,000 must be reported to the IRS. This means that, over a person’s lifetime, he or she may make an unlimited number of gifts that do not exceed the $14,000 per year annual exclusion. This amount is periodically adjusted for inflation.
Gift taxes will not be due until the lifetime exclusion amount is exceeded. The lifetime exclusion for gift and estate taxes is currently $5.49 million. For all amounts in excess of the annual exclusion amount, there will be no gift taxes due until the taxable total exceeds $5.49 over the donor’s lifetime. The lifetime exclusion amount is available only to U.S. citizens and permanent residents. The gift tax rate is the same as the estate tax rate, which is 40 percent.
If the original owner retains a life estate in the real property, or some other retained interest, it is likely that a completed gift has not been made.17 It is possible that all or a portion of the value of the real estate will be included in the original owner’s gross estate for estate tax purposes.
While gifts to a spouse who is a U.S. citizen are subject to a marital deduction, the rules involving pre-1977 transfers for gifts between spouses and gifts between one spouse and another who is not a U.S. citizen each have different rules that can affect the outcome.18
• Estate Tax Ramifications — Practitioners should also consider the effect of transfers of property on estate taxes. Gifts using a person’s lifetime exclusion amount also reduce one’s estate tax exemption, which is $5.49 million for deaths in 2017.19 For example, a person who dies in 2017 after making gifts of $1 million above the annual exclusion amount has an estate tax exemption reduced by $1 million, meaning the value of the gross estate value in excess of $4.49 would be subject to the estate tax.
• Generation-Skipping Transfer Tax — Gifts to persons two generations or younger, if related, or 37 ½ years younger than the donor if not related, are subject to a generation-skipping tax. Such gifts trigger certain filing and election requirements and should be reviewed very carefully. There is also a generation-skipping transfer tax exemption, which is the same as the estate tax exemption.20
• Transfers to Non-Citizens — Gifts and transfers involving individuals who are not U.S. citizens or permanent residents can present special issues. With gifts, the unlimited marital deduction is not available for gifts to a non-citizen spouse. Instead, there is an annual gift tax exclusion for gifts to a non-citizen spouse in the amount of $149,000 for gifts made in 2017.21 This amount is adjusted periodically for inflation. For real property, creating joint ownership between spouses is not considered an immediate gift, but a gift could occur if the ownership is split, or the sale proceeds are not divided properly.22
• Estates of Non-Resident Aliens — There could be estate taxes on the death of a joint owner who is a non-resident alien. The lower estate tax exclusion amount of $60,000 applies for non-resident alien estates, based upon real property, tangible property, and intangible property located in the U.S. and owned by the non-resident.23 The surviving spouse will have the burden of proving how much the deceased spouse contributed to the purchase for purposes of determining the amount subject to tax.
• FIRPTA — Sales by a non-citizen owner are also subject to the Foreign Investors in Real Property Tax ACT (FIRPTA) and may cause a 15 percent withholding upon sale, even if the non-citizen never contributed funds to purchase the property and does not plan to take any of the sale proceeds.24 Heirs could owe capital gains tax if they sell the property at a price higher than the value on the date of the prior owner’s death. The heirs receive the benefit of a stepped-up basis for purposes of calculating their capital gains taxes, as noted above.
• Probate — Many Floridians are convinced that probate should be avoided at all costs. For an interest in real property to avoid probate, the land must be validly conveyed in one of the following ways: to two or more owners as “joint tenants with rights of survivorship”; to a valid trust that does not violate the restrictions on the devise of homestead for an owner who is survived by a spouse and/or minor child; or to a husband and wife who are married at the time of transfer and remain married continuously, creating ownership as tenants by the entireties. Probate is required when the deed transferring the decedent’s interest is not valid due to technical deficiencies, such as invalid execution, improper legal description, etc.; failure to join the spouse in the transfer of homestead; or the decedent’s trust does not give the surviving spouse fee simple ownership and the surviving spouse never waived his or her homestead rights during the deceased spouse’s lifetime.25 Ownership by a husband and wife is converted to tenants in common upon their divorce, even if they later remarry each other.26 The interest of the deceased tenant in common must be probated.
• Challenges to Lifetime Transfers — A lifetime transfer could still be subject to the same claims as a will or trust. Therefore, a deed that has the effect of disinheriting a spouse, child, or other beneficiary named in a will or trust, or avoiding valid debts, could thereafter be subject to claims of incapacity or undue influence,27 elective share rights,28 homestead protections for spouses and minor children,29 or creditors claiming a fraudulent conveyance.30
• Constitutional Conveyance Restrictions — Fla. Const. art. X, §4(c) has two important homestead protections for the spouse during the owner’s lifetime, and further protections for the spouse and minor children upon the owner’s death. The homestead tax exemption is governed by Fla. Const. art. VII, §6. Article VII homestead is not necessarily art. X homestead, and vice versa. Certainly, it is appropriate that an attorney be consulted to determine whether a particular property is homestead. It is largely a question of facts as they exist at any given moment as applied to the constitutional provisions. The property appraiser’s approval of the homestead is not conclusive for art. X, §4 purposes.
If one of the owners is married and lives on the property, or the owner’s spouse or dependents live on the property, that owner’s spouse must sign deeds and mortgages due to the requirements of the Florida Constitution. This creates difficult situations when an owner resides on the property but is separated, divorced with minor children, or estranged from his or her spouse.31
• Joint Ownership — Ownership as joint tenants with the rights of survivorship or tenants by the entireties is not subject to the restrictions on the devise of a homestead.32 Ownership passes by operation of law, rather than devise.33 For a married couple, ownership of homestead property as tenants by the entireties will avoid probate on the first death. Joint ownership does not escape the protections for a surviving spouse under the elective share laws.34
• Devise Restrictions — Even if the deceased owner’s will or trust provides otherwise, the Florida Constitution provides that the deceased owner’s interest in homestead property cannot be devised to anyone if a minor child survives the decedent. If there is no minor child, then the homestead can be devised to the surviving spouse. Failure to recognize the constitutional restrictions can create a title defect.35 Disclaimers of the spouse’s right to homestead after the owner’s death do not fix the problem.36 A valid prenuptial or postnuptial can waive the surviving spouse’s homestead rights, but judicial approval is probably required.37 If a homestead owner is survived by minor children, the spouse, if there is one, receives a life estate, with the remainder to the decedent’s lineal descendants. This applies even when the owner has a will or trust. This can produce unexpected results when the will is drafted without an attorney’s advice and there are children from a prior marriage, or when the owner does not have a will.38
• Creditor Issues — Unexpected medical bills, automobile accidents, divorce, and business failures affecting the new joint owner could all result in judgment creditors looking for assets to satisfy their claims. For example, when a parent adds an adult child to the real-estate title or a bank account, the property could be subject to claims against the child in a divorce proceeding or civil lawsuit. This includes creditors who have filed certified copies of judgment, tax liens, and other statutory liens. Even with the payment of full consideration, many liens may remain intact when the seller transfers title. Creditors may also claim that the transfer was a fraudulent conveyance if full value was not paid. Also, if there are creditors of the new joint owner who have recorded judgments against the new joint owner, these creditors will have a lien against the property upon which they can foreclose. Two nonspouse owners may own as tenants in common, which allows the creditors of one tenant in common to levy against that tenant’s interest. If the creditor has an enforceable judgment lien, the creditor must be paid upon the sale of the property, even if the owner who owes the debt is removed from the title prior to the sale. Finally, a joint owner who does not reside on the property cannot claim the protection of Fla. Const. art. X, §4, nor can he or she claim the normal protection of sale proceeds upon the sale of homestead property.
• Community Associations — Ownership in communities such as condominium, cooperative developments, and planned communities are often subject to ownership restrictions. The restrictions may require association approval for new owners, a right of first refusal by the association, age restrictions, and application and background check requirements. Failure to follow these restrictions in the transfer of such property could result in the association having the right to have the sale or transfer set aside.
• Medicaid Planning — The practitioner should also be aware of Medicaid qualification rules in considering whether to transfer ownership of property. Florida Medicaid regulations do not count the applicant’s home as a countable resource, even if the applicant is going into a nursing home.39 This protection could be lost if the applicant rents the home and the home no longer maintains its protected homestead status. Equity is limited to $500,000 with annual adjustments for inflation, currently at $560,000 for Florida applicants.40
A gift of an interest in real property counts as a gift and will disqualify an applicant from benefits for a period of time based upon the value of the gift and the current cost of the nursing home care. Even if the IRS does not treat the gift as taxable (gifts of less than $14,000 per year; payment of tuition or medical expenses; or gifts to charity, etc.), the Medicaid rules treat the transactions as a gift. Medicaid regulations provide for a five-year “look back” period.41 A deed reserving a life estate, as long as the applicant maintains an “intent to return,” with a remainder to third parties, does not disqualify an applicant from Medicaid,42 nor does a transfer between spouses. Medicaid qualification is complex. A lawyer familiar with this area of the law should be consulted.
• Mortgage Defaults — Many mortgages have “due on sale” clauses that provide for a default upon a change in beneficial ownership of the property, resulting in a demand for the entire balance due. Also, reverse mortgages frequently have terms that require repayment of the entire loan when there is a change of ownership or when someone who is not qualified for a reverse mortgage becomes an owner.
• Title Insurance Coverage — If the seller has title insurance that was provided at the time of purchase, the title insurance probably will not protect the new owner unless title insurance is purchased to cover the new owner. Even a gift to a child, if the deed is not drafted properly, will result in a loss of title insurance coverage. Because a new owner is not named as the insured owner in the title policy, title insurance coverage is probably lost. If, however, a person inherits ownership, the title policy coverage will likely continue with respect to claims resulting from circumstances prior to the owner’s death.
• Marital Issues — If an owner becomes involved in a divorce proceeding, the owner’s spouse could claim an interest in the property, even if that owner paid nothing to be added to the title. The characterization of property as marital or separate could be changed by adding one spouse to the title. If a couple purchases Florida real property while living in a community property state, it is possible that the community property laws could affect the disposition of property in the event of divorce.43 Finally, if an owner resides on real property as his or her primary residence, and marries after a deed is signed, the owner’s surviving spouse could have rights under Florida’s Constitution and elective share laws.
• Loss of Control — Finally, there is the very basic loss of control over the property, obviously, after a transfer or joining a party to the deed. Each owner will be required to sign any deeds, mortgages, or other documents relating to the ownership and each owner will probably be entitled to claim a portion of the proceeds of the sale or cash-out refinance. A joint owner could unilaterally sign a deed to sell or give his or her share of ownership to a third party, including a stranger. Therefore, it would be advisable for joint owners who are not married to enter into an ownership agreement outlining their rights and duties with regard to the property. Cash contributions to the property should be carefully documented as should expenses. All of these items may bring with them income tax liability such that a tax professional should be consulted.
In conclusion, it is easy to see that a seemingly simple request for a quitclaim deed triggers many pitfalls and traps. Therefore, a real estate attorney licensed in Florida should always be consulted when a deed transferring an interest in real property is being considered, as well as a licensed Florida attorney familiar with estate planning and elder law issues. Just as a doctor might examine a patient before prescribing medication, so should a lawyer fully examine a client’s circumstances before preparing a deed.
1 Fla. Admin. Code §12B-4.060(3); Fla. Stat. §202.02(1)(a).
2 Fla. Stat. §201.02(1)(a); Dep’t of Revenue v. Pinellas VP, LLC, 3 So. 3d 361, 363 (Fla. 2d DCA 2009)
3 Fla. Admin. Code §12B-4.060(3); Fla. Stat. §202.02(1)(a).
4 Id. In the case of a short sale, taxable consideration for a short sale transfer does not include unpaid indebtedness that is forgiven or released if certain conditions are met. Fla. Stat. §201.02.
5 Fla. Stat. §201.02. There is an additional surcharge in Miami-Dade County.
6 Estate of Levine v. Commissioner, 634 F.2d 12 (2d Cir. 1980), aff’g 72 T.C. 780 (1979); Johnson v. Commissioner, 495 F.2d 1079 (6th Cir. 1974), aff’g 59 T.C. 791 (1973). See Diedrich v. Commissioner, 457 U.S. 191 (1982).
7 26 U.S.C.S. §1015(a); Treas. Reg. §1.1015-1.
8 26 U.S.C.S. §1014.
9 26 U.S.C.S §121.
10 26 C.F.R. §1.6045-4(b)(1).
11 Fla. Stat. §193.155.
12 Fla. Stat. §193.155(3)(a).
13 Fla. Stat. §193.155(3)(a)1.b.
14 Fla. Const. art. VII, §6; Fla. Stat. §196.031.
15 Fla. Atty. Gen. Op. 2007-08.
16 26 U.S.C. §2353(b); Rev. Proc. 2016-55.
17 26 U.S.C. §§2036, 2037, and 2038.
18 26 U.S.C. §2523; Rev. Proc. 2016-55.
20 26 U.S.C. §2631; Rev. Proc. 2016-55.
21 Rev. Proc. 2016-55.
22 Treas. Reg. §§25.2523(i)-2(b)(1), 25.2523(i)-2(b)(2)(i), and 25.2523(i)-2(b)(2)(ii).
23 26 U.S.C. §6018(a)(2); 26 U.S.C. 2102(b)(1).
24 26 U.S.C. §1445.
25 Fla. Stat. §732.4015; Fla. Const. art. X, §4(c).
26 Fla. Stat. §689.15.
27 Patrick J. Lannon, Challenging Inter Vivos Transfers Procured by Undue Influence: Factors to Consider, 82 Fla. Bar. J. 3, 42 (Mar. 2008).
28 Fla. Stat. §§732.201-732.2155.
29 Fla. Const. art. X, §4(c); Fla. Stat. §§732.401 and 732.4015.
30 Fla. Stat. §726.105.
31 See Friscia v. Friscia, 161 So. 3d 513 (Fla. 2d DCA 2014). Mr. Friscia was divorced, but at the time of his death, his dependent children continued to live in the
former marital home. Mr. Friscia had remarried and established a primary residence with his second wife, but his one-half interest in the former marital residence remained homestead for purposes of the devise and descent restrictions, as well as the conveyance restrictions in art. X, §4(c).
32 Fla. Stat. §732.201(33).
33 Ostyn v. Olympic, 455 So. 2d 1137 (Fla. 2d DCA 1984).
34 Fla. Stat. §732.2035(2).
35 Fla. Const. art. X, §4(c).
36 Fla. Stat. §732.401(4); Attorneys’ Title Insurance Fund, Fund Title Notes §16.04.04.C. (Attorneys Title Fund Services, LLC, 2015).
37 Attorneys’ Title Insurance Fund, Fund Title Notes §16.04.04.B. (Attorneys Title Fund Services, LLC 2015).
38 See Friscia, 161 So. 3d at 513.
39 42 U.S.C. §1382b(a)(1); 20 C.F.R. §116.1212; 20 C.F.R. §416.1212(c); Fla. Const. art. X, §4(a)-(b); Florida Economic Self-Sufficiency Public Assistance Policy Manual §§1640.0534, 1640.0543.01, 1640.0543.02, 1640.0543.03, 1640.0543.04, and ESS 1640.0543.05.
40 42 U.S.C. §13961396p(c); 20 C.F.R. §§416.981-416.986; 20 C.F.R. §§416.905- 416.906); Fla. Admin. Code R. 65A-1-712(5)(a); Florida Economic Self-Sufficiency Public Assistance Policy Manual §§1640.0307.04, 1640.0307.05, 1640.307.06, Appendix A-9; Department of Children & Families form CF-2354A.
41 42 U.S.C. 1396p; Fla. Stat. §409.902; Fla. Admin. Code. R. 65A-1.712; DCF Transmittal No. P re: Look-back Period For Long Term Care Programs (Jan. 1, 2010).
42 42. U.S.C. 1396p(b); 42. U.S.C. 1396p(c); CMS State Medicaid Director Letter, SMDL #06-018 (July 27, 2006); Fla. Stat. §709.2105; Fla. Stat. §709.2201; Fla. Stat. §709.2202; Fla. Stat. §744.441; Fla. Stat. §744.444; Fla. Stat. §744.447; Fla. Admin. Code R. 65A-1.712 (2)(b); Florida Economic Self-Sufficiency Public Assistance Policy Manual §§1640.0305.03, ESS 1640.0551
43 Fla. Stat. §§732.216-732.228.
Robert A. Hoonhout is a partner with Barnes Walker, Goethe, Hoonhout, Perron & Shea, PLLC, and practices in the firm’s Sarasota office. He is a member of The Florida Bar and the New Jersey Bar. Hoonhout is a graduate of Lafayette College in Easton, Pennsylvania, and received his law degree with honors in 1978 from Seton Hall University.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Andrew M. O’Malley, chair, and Douglas G. Christy and Jeff Goethe, editors.