Are you considering transferring property to a family member in New Jersey?
Perhaps you are parent giving real estate to a child due to advancing age, or another family member better situated for property maintenance. Important legal aspects should be assessed before beginning the process putting property in a child’s name in New Jersey.
Check out the video or transcript below for 5 important concerns before transferring a house to your child!
Buying, selling, or transferring real estate? Call us at 201-389-8275 or visit the Contact Us page for attorney assistance with real estate purchase and sales. Join our newsletter for regular updates on NJ real estate law.
VIDEO TRANSCRIPT:
This is Earl White, real estate attorney. This is a video about five considerations when transferring property to a family member in New Jersey. First consideration is to make sure you understand the state of the title. Now, before you transfer the property to a family member, the grantee, the transferee, you would want to make sure you’re giving them clear title. You don’t want them to inherit this property, or not through inheritance, but you want them to come into this property before you pass away, they’ll spend money for 10, 15, 20 years before they sell it to maintain it, and then to have inherited a title issue that would create a big problem for them in the future.
Make sure to protect your investment in real estate for the family!
The steps to transfer a house to a child in New Jersey include: contacting a qualified attorney, drafting a deed and other documents required for recording, executing the documents before a notary, submitting the documents to the county for recording, and obtaining the recorded documents. The process to transfer real estate to family is straightforward but the legal considerations are more nuanced.
So you have a title search done, which would include a name search on the current owners and on any outstanding leans that come up, even if you think there’s nothing there and you’re pretty certain. There can be fraud. There can be things that should have gotten resolved, but were not done properly. It’s important that the new buyer or the transferee does not inherit a problem. [inaudible 00:00:55], if it’s in the future and dealt with, a lot of these people won’t be around anymore to resolve it in the future. So make sure you understand the title that you’re transferring to the transferee.
Now, equally important, you want to protect the title. So you’re transferring it to say, the grantee. You also want to run a search on the name of the grantee. You want to make sure that person doesn’t have any present judgements or lawsuits against them because if they lose those or the judgements are valid, that’s going to attach to the property. You could easily destroy the value of the property by doing this transfer to a grantee who then runs into a bunch of legal problems with creditors and then they come after the property. And so you would also want to make sure you’re protecting it and there’s other ways you can stretch.
It doesn’t necessarily have to be a deed transfer. If you want this person to get the equity in the property, you can hold onto it, give it to them in the will. There are other strategies you could use to get this property or the value to them, that don’t involve an ownership transfer at the time. So consideration three also, you really want to consider the tax implications of making the transfer and you’ll consult with an accountant and tax attorney on that issue if there’s anything complicated.
Because just because you’re gifting, this is exactly the point, right? So you want to give $1 deed from mom to daughter or however the family dynamic is working. Okay, that’s still going to be a gift, right? So the transfer, I mean there’s a high limit before you would have a gift tax, but it is still a gift, one that should be reported. So whoever’s doing the transferor, transferring the property, should make sure to understand any gift taxes that might be implicated.
Particularly, this may happen with an older owner giving to a kid, a child or a family member. Now if you’re just going to do the $1 deed, gift the property, when the persons receiving the property goes to sell it, they’re going to get taxed on the capital gains based on the purchase price that the person who gifted it to them.
Another strategy here, rather than doing this transfer to the family member while everyone’s living, you can wait until the owner dies, then let the person get the property then and they would then have a stepped up tax basis. So they’re not going to pay taxes based on what you purchased it. They’re going to pay taxes based on what the market value was at the time of the death.
So the game there would be small, it would be a relatively small gain. And then also just to make sure, as most people already know, if it’s a primary residence that you’ve lived that for two of the last five years, you will get a large capital gains tax reduction. You want to wouldn’t do a transfer and then give that up, that capital gain reduction up because the person you transferred it to never had occupied it. So that could also be a potential tax mistake.
So look into all the tax consequences and consider what other strategies you could use to get that property or that equity to the person, without having to do a deed transfer, if there’s a better way. I mean, sometimes maybe this is the best way to do a de transfer, but maybe there’s other options.
Now you also, if you have an existing mortgage, so a lot of times there’ll be a mortgage on the property. If there is a mortgage, you have to make sure that you handle it the right way because you can’t just add people on title and take people off title freely. Because typically a mortgage has what’s called a due on sale clause. And the due on sale clause says if there’s a transfer of a beneficial interest in the property, then the bank can foreclose on the property. Obviously that’s not what anybody wants.
So if there are federal exceptions for children and spouses, but before doing any transfers, if there is an open mortgage, you’d want to consult with an attorney as to whether or not this should be allowed. And with small exceptions, normally you can’t just do a transfer if there’s an existing mortgage. So then it would have to get paid off usually or something. You could either do a transfer and just pay off the balance. You could do a refinance. There’s some strategies you could use to still get this to family member now. But again, if there’s an existing mortgage, it’s not just a simple matter of just call an attorney, do a deed and just ignore everything else. That’s not the right legal way to handle it.
Last thing is certificates of occupancy. Certificates of occupancy is when the government, like city government comes out and does an inspection of a property, typically upon a resale. And a lot of times for the $1 deeds, you might not get them because it’s very informal. There’s no change of occupancy. But if you are going to be changing occupancy with this deed transfer, so say you’re giving it to the daughter, she’s not really buying it per se, so just for nominal amount, but you are changing occupancy.
So then you really should comply with the city guidelines. Make sure you get the required documentation because you are changing occupancy and you want to make sure you comply with any occupancy change laws. Okay, hopefully that’s helpful. Some consideration to think about when you’re doing your intra-family transfers. If you need any help with real estate sales, feel free to give us a call.
Buying, selling, or transferring real estate? Call us at 201-389-8275 or visit the Contact Us page for attorney assistance with real estate purchase and sales. Join our newsletter for regular updates on NJ real estate law.