When it comes to transferring property, such as rental properties into LLCs or our personal residence into a Trust, it can be confusing understanding whether you should use a quit claim deed or a warranty deed. Here is a brief description of each type of Deed and when they should be used.
Warranty Deed– A warranty deed transfers ownership and explicitly promises the buyer that the transferor has clear title to the property, meaning it is free of liens or claims of ownership. The terms of a warranty deed should state that the transferor “warrants” and conveys the property. The warranty deed may make other promises as well, to address particular problems with the transaction but generally the use of the word “warrant” means that seller/transferor guarantees the new owner as to clear title. Because the seller “warrants” clear title under a warranty deed it is a preferred method of title transfer and should be used by real estate investors and property owners as the default method of transferring title. When transferring title from your own name to your LLC or Trust, the use of a warranty deed typically allows the title insurance you bought when you acquired the property to remain in effect.
Quitclaim Deed– A quitclaim deed transfers whatever ownership interest a person has in a property. It makes no guarantees about the extent of the person’s interest. If you are buying a property from a third-party you would never want to use a quit claim deed because they aren’t making any guarantee as to whether they own it or no or whether they have clear title. It would be like paying someone on the street for a set of keys to a car. Who know whether they own the car or not, you gave them money for it and if they do own it you just bought it but if they don’t own it then you’re out of luck and you’ll have to resolve the ownership issue with the person who legally owns it. Their are limited situations where a quit claim deed is used. In some instances, a quit claim deed is used with the buyer and seller are aware of legal issues or defects to title so the seller transfers their interest and the new buyer has to resolve the title issues. Another, perhaps more common situation, arises in states that have a transfer tax. In some states, for example, they will exempt a transfer taxes on the transfer of title from the owner to their own LLC but only if it is by quit claim deed (e.g. Tennessee). When transferring title to your own LLC, we generally aren’t worried about title issues so the savings on transfer taxes make the quitclaim deed a better option. Most states don’t have a transfer tax, or
To make matters more complicated, some states use the term “Grant Deed”, California being one of the most preeminent. The reality is that a Grant Deed can be used as a Quitclaim Deed OR a Warranty Deed. It essentially depends on the verbiage used inside the terms of the Deed itself. If you see words like “warrant and convey” then you probably have a warranty deed. Bottom line- Make sure that you look at the language used in the deed itself. Don’t think that because you have a Grant Deed you have all of the benefits of a Warranty Deed.
Our Recommendation– Always double check the ‘local’ state and county laws regarding the type of deed to use when transferring property and what the different types of deeds actually provide. HOWEVER, as a general rule of thumb we recommend the Warranty Deed when transferring property to yourself, your trust, or your own company; because we want to make sure that the Title Policy and all of its benefits transfer to the Grantee of your deed.