Q: Can I sign a quitclaim deed or interspousal transfer deed to give up my ownership in a rental property to my husband?
Me and my husband (wife and husband) are an old, married couple that own a rental property in California. The property was purchased after we married. I would assume it would fall under community property law. However, the property deed is in the name of my husband. What I want to know is with a quitclaim deed or interspousal transfer deed could I transfer my ownership interest, if I have one, in the property fully to my husband, so that it becomes my husband's separate property. And then, could he create a separate individual living trust to fully transfer it in its entirety to our son once my husband dies as oppose to giving me, the wife, ownership over the property if my husband dies. Would the quitclaim deed or interspousal transfer deed negate the community property issue? And are there tax implications in signing a quitclaim deed between married spouses? How effective or legally binding would a quitclaim deed be? Under what circumstances could it be contested or revoked?
A:
Can you? Yes.
Should you? Maybe not. Why all the trouble? You might be hurting yourself on taxes.
You can change ("gift" or "transmute") things from Community to Separate Property at will any time. You are correct that it is currently Community Property. You should make a writing of some sort for your records indicating that you have changed the character of the property. Then just Quitclaim the deed to into a Trust.
This process does not require a separate trust just for this purpose. A joint Living Trust can distribute your Separate and Community Property. If you already have a joint Trust, then just make a small amendment. It is your Community Property now so just leave it to your son with your Living Trust upon your husband's death. If you leave it in his Will, then it does get sticky because he is leaving your Community Property to someone while you are alive.
Do not give it to your son outright before death because that will cost him a great deal of money in taxes -- he will lose the stepped up basis on the property.
There should be no federal tax consequence to the transfer between spouses unless you are exceeding your lifetime cumulative gifting limit of $11 million. IRS Pub 504 indicates that it should not affect the tax basis in the property.
My worries are property taxes. This is not your residence, so if it is worth more than $1 Million you will probably get a reassessment for taxes. If you have held the property for any length of time, that will raise your taxes significantly.
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