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4 must-knows about mortgage payoff

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POSTED February 14, 2013 4:54 p.m.

DEAR BENNY: I will be soon paying off (in its entirety) the mortgage on my home. For your information, I have been current on my payments throughout the 10-year term. The mortgage company is a credit union, and I intend to continue residing in my home.

Upon full and complete payment of all that is due on my part, is the mortgage company obliged to record a release of the mortgage (deed of trust) in the land registry of the county or execute a promissory note release? What can/should I expect from the mortgage company in proof of the full and complete payoff? --D.S.

DEAR D.S.: Yours is a legitimate question I get from many readers. First, the process is the same whether you obtained your loan from a bank, a credit union or a mortgage broker/banker. You signed a promissory note and a deed of trust (in some states it was a mortgage). The deed of trust (or mortgage) was recorded among the land records in the jurisdiction where your property is located.

Now that you have paid it off, some document must be recorded among those same land records reflecting that the loan has been paid in full. Some places this is called a “release,” while others call it a “satisfaction.”

Before you send in a check, contact your lender and get a written payoff statement. That statement will include a per-diem interest. Keep in mind that interest accrues daily, and you have to pay the lender up to the date it actually receives your check. Many title (escrow) attorneys actually send the lender a couple more days’ interest just to be on the safe side. Legitimate lenders will refund any overage.

Talk to your lender as to its procedure. Most lenders will take care of recording the release; a small minority will just send you the promissory note and deed of trust marked “paid and canceled” and ask you to handle the recording.

In either case, you should get the original canceled note and deed of trust back from the lender.

DEAR BENNY: My brother, sister and I are selling a home that was gifted to us by our mother several years before her death in 2011. It was her primary residence in Maryland.

The home has sold for $150,000, with deductions for closing costs, repairs and the Maryland recapture tax not yet deducted from the sale price. We are anticipating a profit of less than $40,000 each. We reside respectively in Pennsylvania, North Carolina and South Carolina, and are all in different financial circumstances.

My brother resided in the home for about four years preceding our mother’s death and is retired. My sister is also receiving her deceased husband’s Social Security and retirement benefits. I am age 64 and still employed, and am most concerned about taxes.

What are some suggestions as to how to avoid paying the highest rate of capital gains tax? --Penny

DEAR PENNY: I don’t mean to pick on you, but you should have given thought (and consulted a lawyer or a financial planner) before you sold the property. There would have been some ways in which to lower (or even defer) the capital gains tax.

For example, you could have taken back financing from the buyer, thereby taking advantage of the installment-sale rule. That rule lets you spread the capital gains tax payments over the life of the loan as income comes in every year. You could also have done a 1031 (Starker) exchange, although your brother would not be eligible for that since he lived in the property.

However, now that you have sold the house, you will have to pay the federal capital gains tax plus any applicable Maryland state tax. If your brother has lived and owned the property for at least two out of the five years before it was sold, he can exclude his gain since it is less than $250,000.

One suggestion, however: Has a certified public accountant (CPA) reviewed your situation? Your mother gifted you all the property, which means that her tax basis became yours. But did your mother and father own the property earlier? Did your father die while owning the property? If so, your mother would have the stepped-up basis, which would then be passed on to all of you through her gift.

And have you made sure that you have included all improvements in your calculations?

Finally, this is a clear example of why it is not in the best interests of children to be given (as a gift) any real estate from their parents. Had your mother owned the property at the time of her death, in most cases (and based on your numbers) you would not have had to pay any capital gains tax at all. As you can see from the question and answer below, if the parents want to unload the property for any reason while they are alive, the children should arrange to buy it directly from their parents.

DEAR BENNY: My parents would like to sell the family property/acreage to me for a low amount (considering what it might be worth) in order to help with their living costs as they get older and still keep the property in the family. We will be drawing up a promissory note that will include me paying the current applicable federal rate (AFR) on a long-term loan (currently 2.4 percent, I think), but we are unsure if there is a legal minimum amount they can sell the property to me without it being considered a “gift” by the federal government and tax purposes. The property/acreage has been valued from anywhere from $300/acre to $1,800/acre. --Christy

DEAR CHRISTY: I really don’t have a clear answer. Here are some of my thoughts, but I welcome input from my readers.

First, you should get a definitive appraisal from a legitimate commercial appraiser in your area. It is not sufficient to say that the property value ranges between $300 and $1,800 an acre. If you are ever challenged, the IRS will want to take the highest value.

This happened to a client of mine years ago who inherited a farmhouse on a lot that because of its location was very valuable. We got an appraisal of $70,000, and the IRS got an appraisal -- using the best and highest use for the property -- at more than several million dollars. My client did not want to sell but wanted to live in the house; we ended up compromising with the IRS.

While appraisals do not always correlate with county assessments for real estate tax purposes, that assessment would also be a good benchmark for you to use.

As of Jan. 1 of this year, everyone can gift (tax-free to everyone) up to $14,000 per year. That means that your parents can gift you up to $28,000 toward the value of the property. If you are married, and your husband will go on title with you, this number can be increased to $56,000.

So, depending on your circumstances, you can deduct either $56,000 or $28,000 from the appraised value of the property.

Next, deduct 6 percent of the appraised value. That’s what you would have to pay a real estate agent in commission if your parents want to sell on the open market.

You should have a written contract signed by all concerned. Make sure that your lawyer gets involved, early, in the transaction.

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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