Buy out co-owner and avoid capital gains

6 Replies

Hi BP community,

I want to buy my co-owner out of a property. Does anyone know if it's possible to pay all cash to take their name off of the deed, thereby avoiding closing costs, refinancing, capital gains, etc? It's a single family home with about 50k left on the mortgage. If it can be done, what are some ways that would work?

Thanks!

Kaylyn

Paying all cash will not avoid capital gains.  The mortgage and deed are another issue which I can't speak to.

You are confusing different issues. Capital gain has nothing to do with the mortgage balance for example. How you structure the deal can affect your capital gains and depreciation costs. The can possibly be done in a way that will benefit you, but talk to a tax adviser experience in real estate. 

You will have some closing costs like creation and recording of your deed whether you pay cash or refinance. You will lose any title insurance you currently have unless full title work is done and you get new insurance. 

Your current mortgage can probably call the loan due if you change the name on title in any way. So this may necessitate refinancing. Even if they choose not to call the loan due the partner will still be legally responsible for the mortgage (assuming he or she was on the mortgage to start with. )

Hey @Ned Carey thanks for the answer. I do understand that the mortgage is something different, I just wanted to clarify in case anyone asked what kind of property. But what you're saying is good information. Question - if the current co-owner is no longer on the on the deed and title and no longer owns the house, why would they still legally be responsible for the mortgage? Please clarify if you don't mind.

Thank you! Kaylyn

Originally posted by @Kaylyn T. :

Question - if the current co-owner is no longer on the on the deed and title and no longer owns the house, why would they still legally be responsible for the mortgage? Please clarify if you don't mind.

Thank you! Kaylyn

Because the bank doesn't care who owns the house, they just care about being paid.  The mortgage liability is a completely separate asset to the noteholder.  If the primary borrower can't pay the mortgage, the noteholder will absolutely protect their own interests and go after the partner regardless of whether or not their name is on the deed.

This situation happens all the time in divorce cases where one ex-spouse quitclaims the house to the other but later finds out they can't qualify for a loan because the the mortgage is still under both their names and is killing their DTI.

Hey @Frank Jiang thanks for your response. I see what you mean. I have to get them off the mortgage and the only way to do that would be refi. Correct? Thanks

@Kaylyn T. I will add to what @Frank Jiang said. A "Mortgage" is actually two documents; the Promissory note and the Mortgage. 

  • The promissory note is the loan agreement between you and the lender. Whoever signs that is responsible for the loan. 
  • The Mortgage (or deed of trust in some states) is the legal instrument which secures the property as collateral for the loan.

It is important to think of it in those terms as they have two different purposes. Even without the mortgage or even a property, the Note still legally obligates the signer (Signers) to pay the debt. The lender can come after you regardless of what happens to the property.

Yes, refinancing is the only way to get them off the note.

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