The ability to transfer title to a parcel of real estate, in whole or in part, by sale or gift, is a fundamental right of property ownership. If you own a house or a building or land, it’s yours to share however you see fit. Unfortunately, when you encumber the property with a mortgage, you may limit your ability to transfer the property. The lender who has the mortgage on your house also has an interest in the property, and many mortgages either prohibit property transfers or require payment in full in exchange. However, in some cases, you can still add a person to the deed, even if you have a mortgage, without burdening that person with the mortgage.
Review the Loan Documents
Carefully review your promissory note and mortgage or deed of trust. These are the legal documents that govern your loan and let you know what your actual rights are. Most loans provide that in the event of default, the loan can be accelerated; that is, the entire loan balance immediately becomes due. The documents will also provide a list of things that constitute an “event of default”, such as non-payment of monthly mortgage obligation, failure to pay property taxes, and transfer of any part of the property without the lender’s permission. If the documents specifically provide that the mortgage must be paid when you sell the property, such a clause is called a “due on sale” clause.
If your mortgage documents do not contain a prohibition on transferring the property without the lender’s consent, you can simply transfer title by deed; however, if such a prohibition does exist, you must contact the lender.
Make all your contact with the lender in writing and specify that you want to add someone to the deed of your property but not the mortgage. If the lender grants permission, ask it to confirm its consent in writing, as all modifications to any contract generally must be in writing and signed by the parties to be enforceable. If the lender approves the transfer, you can proceed with your deed. This process can be long and difficult, as lenders have no incentive or requirement to give you written consent.
Executing the Transfer
If your lender approves the transfer, you can create, sign and record a deed granting an interest in the property to the person with whom you want to co-own the property. After you both sign the deed, you must record the deed with the county in which the real estate is located. Recording the deed makes the ownership a matter of public record and protects the people on the deed from having their interests taken away from them.
Tax Implications of a Property Transfer
If you add someone to the deed and that person does not pay you for the interest and is not your spouse, you must file a gift tax return. If the value of the interest in your house is worth more than the annual gift tax exclusion, which for the 2017 tax year is $14,000 (it will be $15,000 for 2018). To the IRS, adding someone to your deed is equivalent to giving them a gift of a portion of your real estate’s value. Because calculating the value of the gift and its long-term impact can be complicated, you may choose to seek the help of an estate planning or tax attorney.
When you transfer ownership of your house, it can trigger a reassessment of the value of the property for tax purposes. You could end up paying hundreds of dollars more in property taxes as a result. Some transfers are excluded from reassessment. The types of transfers that are excluded vary among states. For example, if you are adding a spouse to your house title, the deed transfer will be exempt from reassessment in many states.