Legal Question in Real Estate Law in California

What your mother plans to do is the worst possible thing to do to solve the very legitimate concerns she has. First off, it will be an event of default on the loan, and may result in immediate foreclosure. Lenders get very grouchy when the borrower gives away their security, even though the security interest stays attached to the property. When the borrower no longer owns the property, the chances of default go up astronomically, and banks hate that regardless of any good intentions by the borrower. Second, it may subject your mother to gift tax on the equity in the house. Third, it will lose you the capital gains tax benefits you would receive if the house does not transfer to you until she dies (such as by a trust or will). Fourth, as you guessed, it will disqualify you from first time home buyer programs. They are designed to give people a chance to buy real property for the first time, not for people who already own a property. Lastly, if she continues to pay the mortgage out of earnings after the marriage, she will still face community property issues in the event of divorce, because she will have paid the mortgate with community funds. Your mother needs to talk to an attorney who knows pre-nuptual agreements and estate planning to come up with an appropriate plan to deal with her concerns. Her current plan would be a disaster.

The preferred way to do inter-generation property transfers and keep property and wealth in the desired descendant channel is through lawyer-designed trusts -- saves taxes, disputes, avoids probate, etc. and will not trigger due-on-sale clauses in the existing financing.

If your mother owns the house prior to marriage, and it is titled in her name, there is a strong presumption that it is her separate property. Separate property does not become community property just because of marriage. Both Mr. Whipple and Mr. McCormick have pointed out problems and what needs to be done.

I strongly suggest that you have your mother sit down with an attorney competent in estate planning, rather than simply quit claiming property to other people for what appears to be an irrational fear.