• This is NO Subject for Self-Help!
• What is your Goal?
• What About My Mortgage?
• Are There Tax Consequences?
• Kinds of Shared Title
• Types of Deeds
• Special Interests in Real Estate
This is NO Subject for Self-Help!
As real estate lawyers, we spend a lot of time examing property titles, which means we look closely at the work product of others, in the form of deeds and other documents recorded in the public records. We find a great many errors in those papers, both factual and legal, and have to expend significant time (and client expense) correcting those defects.
Who makes those errors? Everyone, pretty much! Laymen, title companies, even other lawyers who are not primarily engaged in real estate law make surprising mistakes, usually based on an incomplete understanding of the consequences involved in the choices made in drafting these important legal documents. Many errors are the product of simple haste.
It’s easy to find form deeds on the internet, but the problem is this: when laymen draft their own deeds, they are more often wrong than right. Don’t do it! The cost of having a real estate lawyer draft your deeds really isn’t that much.
What Is Your Goal?
The most common reason that people wish to write deeds concerning property that they already own is to add (or subtract) the names of loved ones to (or from) ownership in the property. Adding a new spouse to title, a child, parent, sibling or significant other is a frequent motivation to write a deed. Creating a SURVIVORSHIP, in order to assure that the loved one gets full title upon the death of the other title holder and avoid probate is also a common goal. The common thread in all these situations is that the parties have a relationship of trust to each other, and little or no cost is involved. These deeds are often referred to as “deeds of convenience.”
These reasons for making changes to the title of real estate are entirely reasonable and seldom controversial, but the deeds must be drafted very carefully, they must be correctly executed, the information must be accurate, and you must fully understand all of the consequences to adjusting your title. I can only urge you to seek the advice of a real estate lawyer before undertaking these actions.
Sometimes, people who are struggling financially are tempted to believe that transferring title to another will relieve them of the mortgage debt, but it is usually a huge mistake. Not only does it NOT relieve them of the debt, but they are frequently victims of a mortgage foreclosure rescue scheme fraud!
What About my Mortgage?
Years ago, many people had what were known as “assumable mortgages,” that is, you could sell your home, and the buyer could step into your shoes by taking over the payments on the mortgage. Almost no assumable mortgages are in place any more. Instead, most mortgages have provisions known as “due on sale” clauses. Under those clauses, the bank (mortgagee) has the right to foreclose because you have sold the leveraged property. Depending upon the wording of that clause (they aren’t all the same), the bank may be able to foreclose if you make any change to the title, unless you get their consent in writing in advance.
The truth is, lenders have enough trouble foreclosing on people who have stopped paying their monthly payments that they should let everyone else alone, but they have the right, so you are taking a chance if you execute deeds without taking the time to seek permission. The fact is, they usually don’t care if you make those kind of changes, if you ask them first. I always read the language of the clause in the mortgage itself before writing a deed changing the title. If the language requires it, I advise clients to talk to the lender, and seek their permission.
Are There Tax Consequences?
When you sell real estate (or even a partial interest in it), it is a potentially taxable event. Depending upon the price you paid when you purchased it, you will realize a gain or loss. That is generally subject to Federal income tax liability.
Deeds of convenience are generally executed without consideration, that is to say, your loved one isn’t paying anything for the interest granted. That usually makes it a gift, and exempt from Federal income tax.
The State of Florida still charges a tax known as the documentary stamp tax. This is seventy cents ($0.70) for every one-hundred dollars of value (consideration), or fraction thereof. The common-law of deeds requires at least “nominal” consideration for them to be deemed valid, so practitioners traditionally recite “ten dollars and other good and valuable consideration,” regardless of the actual amount paid.
In 1990, the Florida statutes were amended to add the amount of any lien or mortgage on real estate to the total consideration, for purposes of calculating documentary taxes, even though the “buyer” is not assuming liability for the mortgage. This was ignored by most practitioners in most cases, but recently, as state government is searching for cash, the Florida Department of Revenue has been auditing recorded deeds, and writing to the parties, charging them for documenary stamps (and interest and possibly a penalty) if they didn’t pay it when the deed is recorded.
Let’s suppose you own a piece of property strictly in your own name, and you add your new spouse to the title. The property is worth $300,000, but your spouse isn’t paying anything for his or her interest, making it a gift. However, there is a mortgage for $200,000 on it, with a principal balance remaining at the time of the deed of $100,000. How much documentary stamp tax would be due?
Assuming that you are making your spouse an equal “partner” in the property, you are giving a 50% interest. That means (under Florida Statute Chapter 201.02) that the tax would be on $100,000 (the mortgage balance) divided by 2 (for the 50% interest) times .70/100 (seventy cents per $100 of value), or $350. This is addition to any actual consideration paid, and the cost of recording the document.
Kinds of Shared Title
When only one person owns real estate, he or she owns all the rights to the property without limitation on its use or inheritability. When he or she dies, it passes by inheritance, by virtue of the terms of that person’s will (if they have one), or by intestate succession if there is no will. In either event, it goes through probate, that is, a Court supervises the distribution, which often results in delay and expense, along with the possibility of legal challenge.
Where two (or more) people own real estate, their ownership may be in several different forms. The simplest is called Tenancy in Common. There is no limit on how the tenants share the percentage of ownership. It can be in equal shares (or not), but when any tenant dies, his or her share passess to their heirs the same as in the paragraph above. Again, probate is required. Florida law presumes Tenancy in Common, so, even if you desire otherwise, if the language isn’t correctly drafted, it will fail, and a Tenancy in Common will result.
Frequently owners wish to avoid probate by providing “survivability,” that is, if one owner dies, the remaining owners automatically, at the moment of death, become the owners of the entire interest. This is a Joint Tenancy, and avoids probate. Once created, the terms of the owners wills no longer control the distribution of that property, the deed does, and probate is avoided. A deed to a married couple presumes a form of Joint Tenancy known as Tenancy by the Entirety. At common law, a married couple is treated as a single entity, the “entirety.” The entirety is the owner, but it operates about the same as any Joint Tenancy.
Types of Deeds
The usual kind of deed used to sell real estate is the Warranty Deed. It includes a list of specific assurances of the right of the seller to pass title to the buyer, such as the pledge to defend the title if challenged. Those assurances are greatly enhanced by the use of Title Insurance, which is an actual insurance policy that the seller usually pays for at closing.
A Special Warranty Deed contains more limited assurances of title, so it is lesser than, not greater than the usual Warranty Deed. The assurances are limited to defects and issues that arose during the ownership of the seller. Developers frequently pass title by Special Warranty Deed.
Deeds of Convenience, as discussed above, are usually accomplished with a Quit Claim Deed. A Quit Claim Deed makes no representations or assurances of title, it just transfers whatever interest the seller actually owns.
There are other more specialized kinds of deeds for specific purposes, such as the Personal Representatives Deed, which is used strictly to transfer property out of an estate in probate, and Trustees Deeds, to grant title out of a trust.
Special Interests in Real Estate
The usual ownership interest in real estate is known as Fee Simple. Any given piece of real estate has a bundle of rights, which includes the possession and use of the property, the right to exclude others, the right to pass it to your heirs, or to lease it to others. Fee Simple ownership means the entire bundle of rights to property is held by the owner.
The other special interests all inlude less than the full bundle of rights.
One example of a lesser estate is the Life Estate. The owner of a Life Estate can reside on the property for as long as he or she lives, at which time the right to possession reverts to another.
Enhanced Life Estate, or “Lady Bird Deeds” are a combination of features designed to address Medicaid rules, and allow for continuation of the homestead status of real estate, among other purposes.
There are a number of what are known as Future Interests, used mostly for estate planning purposes. These include Remainders, Reverters and Executory Interests. Their use is beyond the scope of this essay.
NOTE: The information provided is a general discussion only, and is not a substitute for the advice of a qualified attorney. My goal in publishing this material is to enable you to be a more sophisticated consumer, not to draft and execute deeds yourself. If you are enabled to ask better questions, and better understand the answers provided by your lawyer, my goal is realised.