Transferring a mortgaged property may trigger a "due on sale" clause
In most home mortgages, there is a “due on sale,” or “acceleration” clause. This clause allows the bank or mortgage company to demand full payment of the balance of the mortgage when the property is sold or transferred, and if payment is not made, the bank or mortgage company could ultimately seek foreclosure. A transfer of even a partial ownership interest in the property can trigger this clause. Although banks and mortgage companies do not always accelerate the mortgage when a partial transfer occurs, it is important to understand that they typically have the right to do so. With proper planning the potential effect of this clause can be minimized or eliminated completely.
Adding a partner to a mortgage doesn't transfer ownership of the property
One of the common ways same-sex couples may look at to share ownership in a property owned by only one partner is by refinancing that property in both partners’ names. This, unfortunately, only gives them a partial solution to their goal of joint ownership. By adding your partner to the mortgage, you are making them obligated to pay the mortgage, but there has been no actual transfer of ownership. In order to transfer an ownership interest, you must deed that interest in the property. The good news is, if you can successfully refinance the property to include both partners on the mortgage, this transfer by deed does not usually violate the “due on sale” clause discussed above.
Always remember to evaluate the tax implications of a transfer of real property
An often overlooked area when transferring property between couples in a domestic partnership is that of gift taxes. When a gift is made to a person, there may be tax consequences on the Federal level (via the IRS), and even on the State level. A transfer of ownership in property can be considered by the IRS as a gift when it is made for anything less than the “fair market value” of that property. For the vast majority of people this is not an issue because the current federal gift tax exemption is $5.25 million over the lifetime of one person. This means that most people won’t need to actually pay any taxes when they give a piece of property to someone else. You may, however, be required to file a gift tax return with the IRS regardless of whether you have to pay a tax, and you should check with your CPA to make sure. For the small percentage of those people that may exceed the exemption amount, now or in the future, it is important to have a proper estate plan in place to minimize potential tax liability.
Get an attorney to help ... you'll be glad you did
Same sex couples should seek the advice of a competent attorney that understands their unique needs to help in the planning and drafting these documents, and assisting in the purchase or transfer of your real estate.
To get more information on how to conduct real estate transactions for same sex couples, click here or contact us for a free phone consultation.