Tax Implications of a Virginia Transfer on Death Deed

A Transfer on Death Deed (TODD) is a legal instrument under Virginia law that permits a property owner, known as the grantor, to name a beneficiary who will automatically inherit the property upon the grantor’s death. This transfer occurs outside of the probate process and is governed by the Uniform Real Property Transfer on Death Act. A key characteristic of a Virginia TODD is that it is revocable. During their lifetime, the grantor retains the right to amend the deed to name a different beneficiary or revoke the instrument entirely, ensuring they never lose control over their property.

Tax Implications During the Grantor’s Lifetime

Creating and recording a Transfer on Death Deed is not a taxable event for federal gift tax purposes. Under Internal Revenue Service regulations, a gift is only complete when the donor has irrevocably parted with control over the property. Because a TODD is revocable, the transfer is deemed incomplete, and the grantor is not required to file a federal gift tax return (Form 709) when the deed is executed.

The grantor’s responsibilities for income and property taxes also remain unchanged after recording a TODD. Since the grantor continues to be the legal owner, they remain liable for all local real estate taxes. The grantor also continues to report any rental income generated by the property on their personal income tax return and can take any associated deductions, such as for mortgage interest or property taxes paid.

While Virginia levies a state recordation tax on most deed transfers, a Transfer on Death Deed is specifically exempt from this tax provided no money is exchanged for the deed. This means the value-based tax is not due. However, the grantor must still pay the nominal, flat-rate clerk’s fees required by the circuit court to record the document in the local land records. This exemption makes the initial setup of a TODD a low-cost action, with the primary expense limited to document preparation and standard administrative fees.

Tax Consequences at the Time of Transfer

Upon the death of the grantor, the ownership of the property automatically transfers to the designated beneficiary, which has several tax consequences. The property’s value is included in the grantor’s gross estate for estate tax purposes. The value used for this calculation is the full fair market value of the property as of the grantor’s date of death, not the original purchase price.

This inclusion is relevant for calculating potential federal estate tax liability. For estates of decedents dying in 2025, the federal estate tax exemption is $13.99 million per individual. If the total value of the grantor’s taxable estate, including the property, is below this threshold, no federal estate tax will be due. Due to the portability of the exemption between spouses, a married couple can shield a combined total of nearly $28 million.

Virginia repealed its state-level estate tax for all decedents who passed away on or after July 1, 2007. Therefore, regardless of the size of the grantor’s estate, no separate Virginia estate tax return needs to be filed, and no estate tax will be owed to the Commonwealth of Virginia.

Furthermore, Virginia does not impose an inheritance tax, which is a tax levied on the beneficiary for the assets they receive. The beneficiary of a TODD will not owe any state tax simply for inheriting the property. After the grantor’s death, the beneficiary will need to record a document, such as a Notice of Death Affidavit along with the death certificate, in the land records to formally clear the property’s title. This action involves paying a nominal recording fee to the clerk’s office.

Beneficiary’s Tax Basis and Future Tax Liability

For the beneficiary who inherits property through a TODD, a significant tax consequence is the “stepped-up basis” rule from Section 1014 of the Internal Revenue Code. This rule dictates that the beneficiary’s cost basis in the inherited property is adjusted to the property’s fair market value on the date of the grantor’s death. This provision effectively erases the capital appreciation that occurred during the grantor’s ownership for income tax purposes.

To illustrate, consider a grantor who purchased a home for $100,000. At the time of the grantor’s death, the home’s fair market value was determined to be $450,000. Under the stepped-up basis rule, the beneficiary who inherits the home through the TODD receives it with a new cost basis of $450,000.

This step-up in basis has a direct impact on the beneficiary’s future capital gains tax liability if they decide to sell the property. Continuing the example, if the beneficiary sells the home a year later for $475,000, their taxable capital gain is calculated based on the difference between the sale price and their stepped-up basis. The taxable gain would be only $25,000 ($475,000 sale price – $450,000 basis).

The advantage of this rule becomes clear when contrasted with a lifetime gift. If the grantor had gifted the same property to the beneficiary during their lifetime, the beneficiary would have received a “carryover basis,” inheriting the grantor’s original $100,000 cost basis. A subsequent sale for $475,000 would have resulted in a taxable capital gain of $375,000.

Upon inheriting the property, the beneficiary becomes the new legal owner and assumes full responsibility for all future financial obligations. This includes the requirement to pay all ongoing local property taxes from the date of inheritance forward. The local tax assessor’s office will update its records to reflect the new ownership.