Legal Question in Real Estate Law in California
My parents purchased a house in 2008.
My wife and I purchased the house from them via a seller financing in 2008.
My wife and I have lived in the house the entire time. It is our principal residence.
My wife and I make payments to my dad each month on the loan and have done so since 2008.
My wife and I have been claiming the interest on the loan on our taxes.
Our seller financing loan was never recorded with the County.
Originally my parents were the only ones on the grant deed recorded in 2008.
In 2009 I was added to the grant deed.
Since 2009 the recorded grant deed has read, my parents, and me all as joint tenants.
My wife and I are refinancing the seller financing loan.
My wife and I will pay off my dad, add my wife to the grant deed, remove my parents, and have a loan with some third party bank.
My parents have a loan with a bank secured by the house.
As part of the refinance, that bank loan will be paid off and the difference between what I owe my parents on the seller financing loan and what my parents owe to the bank will be paid directly to my parents.
(e.g. My wife and I owe my parents $300k, my parents owe the bank $200k, during escrow the bank will be paid $200k and my parents will be paid $100k)
Question (1): On the new grant deed to be recorded (adding my wife and removing my parents) it says this is a bonafide gift (R&T 11911). Is this true? Are there tax implications to calling this a gift?
Question (2): On the County's preliminary change of ownership form (PCOR), should I answer that YES, this is a transfer between parents and children? And/or YES, this transaction is recorded only as a requirement for financing purposes to create, terminate, or reconvey a security interest (i.e. a lender�s interest in the property)?
2 Answers from Attorneys
You have created somewhat of a mess with the way you did things back in 2008 and 2009. The simple answer to your questions, however, is that you will only make things worse by recording any more documents that are not concurrent with the new loan you intend to take out. On record it looks like your parents made a gift to you back in 2009 which had tax implications then and now. Don't mess up the record further with more deeds, until you are ready to create what will look like an arms length purchase when you take out the loan and pay off your parents. The only thing you MIGHT need to record ahead of the loan transaction, would be a deed from you back to your parents undoing the mistake of 2009. Consult with your loan broker and escrow company about that when you go to get the loan.
The previous answer by Mr. McCormick, who is an expert in such matters, looks right to me except for one thing. You say "Our seller financing loan was never recorded........" That's usual. The loan documents (promissory note secured by real estate) are not customarily recorded. What IS recorded, however, is the security instrument, e.g. the deed of trust. I point this out in the hope that it might assist in your further discussions with the loan broker and/or escrow company.
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