How Does a Neutral Transfer of Property Affect Taxes?

Escrow Transfers

Escrow is an account where money is placed on behalf of buyers, mortgage lenders and sellers of property. In most states, the title company that handles the property closing sets up and manages the escrow account. In some states, though, attorneys can perform this function. The title company is a neutral third party that gathers money from all parties involved and holds it "in escrow" until all stipulations of the purchase agreement and closing documents have been met. Then the title company distributes the money where it is supposed to go (e.g., to the seller, the real estate agent and the tax office) and transfers the property title to the new owner.

Trusts are sometimes set up to make sure that upon an individual's death, an estate asset like property goes to the individual's intended beneficiaries without having to be entered into probate first. Trusts are a type of neutral transfer of property. The trustee of the trust itself is neutral in that he is charged to act on behalf of the trust itself, rather than the trustor and the beneficiaries. Furthermore, there is no money due when the trust's beneficiaries begin to benefit from the property.

Some transfers of property ownership (for instance, in the case of property owned by minors or individuals who have been appointed guardians by a court, or by similar individuals who want to purchase property) have to be done through a guardian or court-appointed representative. In this case, the representative has the individual's power of attorney and can sign ownership transfer or sale documents on behalf of the property's owner or buyer. The representative is responsible for paying any taxes due on behalf of his charge.

A 1031 exchange, also known as a "tax deferred exchange," is another type of neutral property transfer specifically recognized by the Internal Revenue Service. It is similar to a normal exchange of property, except it is handled by a neutral representative and taxes on the sale are deferred.

Quitclaim and gift deeds are often used to transfer property ownership from one party to another. Gift deeds do not bear any monetary component, but quitclaims can if the parties agree to it. If no money changes hands, then the transfer of property is a neutral one and has no affect on taxes. In the case of a quitclaim deed, if a monetary payment is part of the ownership transfer, then it is not a neutral transfer and sales tax is due at the time of deed filing.