Quitclaim deed transfers ownership, not loan responsibility

August 19, 2011

Q. When I was married, my wife and I signed a loan to buy a house. We got divorced, but she was awarded the house in the divorce agreement and stayed in the property for a few years after our marriage ended.

I had to sign a quit­claim deed, and in the divorce decree, it was stated that she would refinance if possible. Well, the house went into foreclosure and was sold, and now the lender is coming after me for some of the money.

Am I still liable for this loan? It has been years since I lived in the property. If I am liable, what can I do to take care of this situation?

A. When you signed the quit­claim deed, ownership of the property transferred to your wife. But your name remained on the loan documents. If your wife did not refinance, then your name stayed on the original loan, which makes you legally liable for this debt. Your divorce agreement did not get rid of your continuing obligation to your mortgage lender to make the monthly payments.

Not only do you owe the entire sum on the loan, but your credit has also probably been trashed by the foreclosure. The lender has probably been reporting you as severely delinquent on the mortgage. Now, you’ll have that foreclosure listed on your credit history as well.

To check out the status of your credit, go to AnnualCreditReport.com and get a free copy of your credit history from each of the three credit reporting bureaus — Experian, Equifax and TransUnion. For about $9, you can purchase a copy of your credit score, which will tell you how you’re doing. If you’ve already picked up your free annual copy of your credit history, you can buy a copy of your credit history from any of the credit reporting bureaus or from MyFico.com.

As for what you should do next, I’d recommend speaking with your divorce lawyer, who should be able to advise you on what you owe and how to approach the lender for this negotiation.

Q. My sister owns a rental property in California. The property is valued at $250,000 and she owes $200,000 on the mortgage. She also has a mortgage on her primary residence nearby.

She wants to give me the rental property, which would become my primary home. I would assume the monthly mortgage payment. What are the tax implications for both of us? Would she have a big tax bill? Is there another way to handle the transfer that would lessen the financial impact on us both? Can she just add me as an owner or can she “gift” me $13,000 per year of property value for the next few years?

A. The property is worth $250,000, and she has a loan for $200,000. That means she has about $50,000 in equity.

Your sister could gift you the property over three or four years, $13,000 at a time. But if this is a rental property, she has probably been depreciating the property over the years. That means she has to “recapture” that depreciation on her taxes.

In other words, simply giving this property away doesn’t alleviate the tax issue. If she has depreciated the property, she may still owe some federal income taxes for that, and it has nothing to do with how much the property sells for or if she gives it away.

Tax issues on investment properties can be complicated. You might think you have no profit on paper, but you may still owe federal income taxes on the sale. You may think you have a loss on paper, but you may not be able to take any federal income tax benefits from that loss. On these issues, you need to work with a good accountant.

As far as assuming the mortgage payments, you generally can’t assume a loan under the terms of the mortgage documents. The original loan was given to your sister, and her loan documents most likely give the lender the right to call the loan if she sells or disposes of the home in any manner. This provision in the documents is generally referred to as the “due on sale” clause.

You can continue making the payments, but your sister’s name will remain on the loan and she will be liable for it. If you take title to the property, and the lender finds out, it may decide to call the loan and require full payment on the balance owed.

You and your sister have several issues to contend with. First, she needs to figure out how the property has affected her personal taxes over the years and determine what impact the transfer would have on her federal income taxes. Next, she needs to know what restrictions she has on her loan and whether her lender would allow her to transfer title to you. And if she knows these restrictions and decides to proceed anyway, you need to know the risks of having the loan called. Finally, you need to determine whether you can afford to buy and own this property and continue to make all the payments that are owed.

Start by calling your sister’s tax preparer. You’ll also need the assistance of a good real estate lawyer who can prepare the necessary documents and get the title transferred into your name.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” If you have questions for her, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact her through www.thinkglink.com.

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