There are many reasons why you want to own a home but do not want to be on the deed. These include mortgage application problems, tax issues (only your principal residence is exempt from capital gains), and personal and family issues (the house is really meant for your child). But if you are not on the deed, you do not have ownership of the property. It doesn’t matter if you are the one who paid for the down payment or the mortgage. Ownership is determined solely by who is listed on the title. Protecting your real estate investment is essential, even if you’re not on the deed. Fortunately, there are several effective strategies to protect your real estate ownership even if you are not on the deed. Keep reading to learn how…
1. Promissory Note
A common scenario is that parents loaned the down payment of the house to their children but choose not to go on the deed due to difficulties in mortgage applications or tax considerations. Instead, the parents can have a lawyer draft a promissory note stating how much the children owe the parents, what are the interest rates (if any), and when will the children pay back the loan (could be upon sale of property).
Advantages:
- Since lenders are not registered on title, it would not affect the borrowers’ mortgage applications and won’t have any tax consequences; this is especially important in situations where parents are the lenders and children are the borrowers;
- Compared to other methods, a promissory note is easy and inexpensive.
Disadvantages:
- Lack of control – As lenders are not on title, they cannot influence the borrowers’ real estate decisions – they cannot stop them from selling, mortgaging, or renting;
- Lowest in priority – If borrowers run out of money, they must first pay back any owed taxes, then registered loans on the title (e.g., mortgages), and finally, unsecured lenders; if the property has no more equity left by the time they get to the unsecured lenders, then there’s not much the lenders can do—they lose their investment.
- Enforcement problems – although the promissory note is legally enforceable, the way to enforce is to sue the borrowers (whereas with a registered loan, lenders can sell the house to recover the loan without formal litigation)
2. Registered Loan
In contrast, a registered loan appears on the title and offers much stronger protection. A registration loan in real estate is a mortgage formally recorded with the government, making the lender’s interest in the property publicly known. This registration is crucial to ensure the lender’s claim has priority over any other claims on the property.
Advantages:
- Control of Property – If the lenders have sound registration and accompanying legal documents, then they can control decisions made to the property including selling, renting, and refinancing; borrowers must get the lenders’ agreement before doing those things, or they’d have to pay the lenders out.
- First come, first serve – A registered loan has priority as of the date it’s registered – whoever is registered first, gets paid out first when the borrowers run out of money or wish to sell the house.
- No formal litigation is required. If the borrowers fail to pay the mortgage within 15 days, then the lenders can start a power of sale. This is a much easier process than formal litigation with a promissory note. Once the power of sale is completed, the lenders can sell the property and recover their investment.
- Matrimonial Home protection – Even if the property is a matrimonial home, a registered loan still must be paid out; this is a common way for parents to protect their down payment to their children in the event of divorce; however, if the loan was registered after the borrower got married, then his/her spouse must sign in consent.
Disadvantages:
- If the lenders are parents and the borrowers are children, then they may worry that registering a loan on the title will affect the children’s future mortgage application – but a simple solution is for the lawyer to postpone the parent’s loan to behind the bank’s mortgage
- The registration process is more complex than just a promissory note – but its much stronger protection makes it well worth it.
3. Wills
Another way to get the property without first being on the deed is to receive it through a Will. Imagine a reverse example: children loaned money to their parents and bought them a house. The parents can keep the house until they pass away, and state in their will that the children are the beneficiaries. This method provides a form of real estate ownership protection for the intended beneficiaries, ensuring their entitlement to the property as stipulated in the will. Read more on why every homeowner need a will.
Advantages：
- The will should be drafted to say that anything given to the beneficiaries will not be split according to family law – it only belongs to them, even if there’s a divorce.
- If the beneficiaries just want money and don’t want to keep the house, then they can sell the property in the name of the estate – that way, they do not pay capital gains and can also get the sale proceeds tax-free.
Disadvantages：
- Cannot protect against matrimonial home;
- Although the beneficiaries do not need to pay capital gains, they must pay estate administration taxes – though this is usually much lower than capital gains (for estate above $50,000 – pay $15 for every $1000)
Conclusion
We have seen many family members and business partners who decide not to go on the deed for mortgage, taxes, or personal reasons. If that happens, it’s essential for them to use other ways to protect their property rights (just showing proof that you paid the down payment or the mortgage is not enough).
As we talked about, those methods include having a promissory note, registering a loan on title, or ensuring that the borrowers wrote a will naming the lenders as beneficiaries of the property. Real estate ownership protection is paramount in such cases.
Varity Law has completed many complex Real Estate and Wills & Estates cases. We invite everyone who has questions to book a 1st free consultation with one of our experienced lawyers here: https://calendly.com/sabrina-668/1stfreeconsult
