Real Estate Matters

IRS recognizes separation of inheritance from marital assets

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, March 27, 2010

Q: I'm married and recently received an inheritance, which I would like to use to buy some real estate as a sole and separate owner. How do I do this to avoid any spousal claims to rights, title and interest in the property? And how do I steer clear of any IRS infractions? I'm afraid that if I don't somehow separate this purchase from our joint household business, I could create some spousal claim on the property and future IRS tax issues.

A: Even if you're married, the IRS recognizes the ability to keep an inheritance separate from marital assets. You are entitled to use funds that are outside the marital estate (such as an inheritance) to buy property that you own on your own.

You should start by finding a lawyer to help you figure out what would be the best vehicle for ownership of the property. You may want to purchase this property in a trust.

You should remember that, once you have bought this property and claim it to be separate from your household, you shouldn't use any marital assets to pay for expenses relating to that property.

Q: My ex-spouse and I live in the same town. He wants to leave his house (which I lived in with him when we were married) to me when he dies. He is thinking about using a quitclaim deed form.

Is there a form he can complete before he dies, or is there another way that the transfer should occur? And do we have to go through a lawyer, or can he do it on his own?

A: Your ex-spouse should set up a revocable trust (you can pay for it if he can't) so that the house automatically becomes yours upon his death. Assuming that Congress gets around to fixing the estate tax at some point and reinstates the stepped-up basis, you will be able to inherit the property at the prevailing market value upon his death.

Right now, whether he gives you the property or you inherit it, you'll get it at his cost basis. If he is going to die soon, a quitclaim deed will work just fine. But the idea of using a quitclaim deed now -- when he is alive -- doesn't make much sense. A quitclaim deed is generally used to transfer the interest in a property from one person to another at the present time.

In some states, you can use a transfer-on-death document or deed to transfer title of the home from your ex-husband to you upon his death. You could consider that option if it's available to you in your state. Otherwise, transferring title of the home into a trust would be another solution for you. If he were to use a trust, he would still own the property until his death, whereupon his trust document would instruct the trustee that you would become the owner. He could change his mind after setting up a trust but, if he doesn't, you would avoid probate upon his death and become the owner of the property.

You can buy trust forms online for your state. You may also be able to buy a transfer-on-death deed or quitclaim deed online.

Be sure to follow the directions about having signatures notarized and properly preparing the documents. If a document needs to be recorded, make sure you take all the necessary steps. Although many people do this themselves, many don't do it properly, causing problems later on. You may want to hire a lawyer or title company to help you.

Q: I sold my home in a short sale several months ago. Now, my credit is bad. My in-laws bought a house for me using my money, but the mortgage and the house is in their name. I pay for everything, but nothing is in my name. Is there a way that I can claim the mortgage interest?

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