“Ask Mr. Azrael”
Selected articles from Jonathan Azrael’s weekly column in the Real Estate section of The Baltimore Sun).
Divorce – Real Property and Tax Issues
lawyer Transferring real estate to a family member
Transferring real estate to a family member
Transferring real estate to a family member has many important implications, including tax effects. For instance, a mother wants to put her house in the name of her two daughters, so they will own it after their mother’s death. In Maryland, there are many options available. Three of the common choices are:
The two daughters can be added to the deed as joint tenants along with the mother. Upon the death of any of the three joint tenants, the home belongs to the survivors. All joint tenants must sign a deed or mortgage for the property. None can act alone.
The two daughters can be added as remaindermen. So long as the mother is alive, she has exclusive rights to the property. All three must consent to any deed or mortgage. After her death, the two daughters own the property, either as joint tenants or as tenants in common, depending on how the deed is written.
The mother can reserve full power to sell or mortgage the property during her lifetime. If the mother still owns the property at her death, it goes to the daughters, either as joint tenants or tenants in common.
Each of the transfers is accomplished by a deed that is recorded in the land records of the county in which the property lies. Transfers between parents, spouses, children, step children and to grandchildren are exempt from Maryland transfer and recordation taxes. Typically, the only cost is $25-$55 to record the new deed and obtain a certificate from the city/county to show that all taxes are current. The deed should be notarized and must be prepared by one of the parties or under the supervision of a Maryland attorney.
When the irrevocable transfer of the property takes effect during the lifetime of the person giving the deed (the “Grantor”), there is a gift for federal tax purposes. Depending on the value of the property interest, the Grantor may have to file a federal gift tax return. The persons receiving the deed (“Grantee”) take over the tax basis of the Grantor. For example, if the mother deeds a house that cost $25,000 to her daughters, their tax basis is $25,000. If the daughter sells the property for $100,000, they will have a $75,000 capital gain to report on their federal and state returns.
When the transfer of property does not take effect until the death of the Grantor, there is no gift. Instead, the value of the property must be included in the decedent’s federal estate tax return. Currently, no federal estate tax is paid unless the taxable estate exceeds $650,000. The Grantees also must pay a Maryland inheritance tax on the value of the interest passing to them. Currently the inheritance tax is 1% of value for transfer to children and grandchildren, and 10% of value for transfer to collateral relatives (siblings, nieces and nephews).
Because of the complexities in titling, taxation and other concerns, it is always best to consult AGF (or another qualified attorney) for advice and assistance.
Insurer must defend sellers against claims of misrepresentation
When an unhappy home buyer sues the former homeowner, claiming that the sellers negligently misrepresented the condition of the home, or failed to disclose defects in the home, the sellers may have the right to require the company that issued their homeowner’s insurance on the property to defend the buyers’ lawsuit.
Here are the facts of a case that Maryland ‘s highest court decided several years ago. The buyers purchased a farmhouse in Frederick County from the sellers. According to the buyers, three weeks after they moved into the home with their nine children, the septic system leaked, causing effluent to flood the surrounding surface area and walks. The Frederick County Health Department condemned the septic system, and the buyers had to spend more than $12,000 to replace the system.
The buyers sued the sellers, claiming (among other things) that the sellers misrepresented that the septic system was in good working order and were negligent and careless in failing to reveal necessary information about the property. The buyers alleged they relied on the sellers’ misrepresentations, and had it not been for those false statements, the buyers would not have moved into the house and would not have used the septic system.
The sellers demanded that their homeowner’s insurance carrier defend the suit. The sellers relied on language commonly found in many homeowners’ policies. Under the policy, the insurer agreed to cover damages for “property damage” and had the right and the duty to defend any lawsuit claiming those damages. “Property damage” was covered only if caused by an “occurrence.” The policy defined “occurrence” as “an accident”, but did not define “accident.”
The insurance company refused to defend the sellers or provide coverage for the claims in the buyers’ lawsuit. The insurer said its policy did not cover misrepresentations about the condition of the home. The Court disagreed, and ruled that the insurance carrier had to defend the action.
The Court’s reasoning involved two steps–
First, for purposes of deciding whether the insurance company has a duty to defend a suit brought against its insured, all of the allegations are assumed to be true. In defending the suit, the insurer, of course, may dispute the plaintiff’s claims. But, in deciding whether the insurer had to pay for lawyers to defend the sellers, the Court assumed that the sellers asserted the septic system was in good working order, and that the sellers carelessly failed to reveal necessary information about the condition of the home.
Next, the Court said that an “accident” occurred, because it was possible that the sellers did not foresee or expect the damage resulting from their alleged negligent and careless assertion that the septic system was “in good working order.”
The ultimate test for an “accident”, under the insurance policy in question, is whether the resulting damage is “an event that takes place without one’s foresight or expectation.” Since it was possible that the sellers did not expect or foresee damage resulting from their alleged misrepresentations about the septic system, the resulting damage fit within the definition of “accident”. Since the claim for negligent misrepresentation was at least potentially covered under the insurance policy as an “occurrence”, the sellers’ insurance company owed the sellers a duty to defend the suit.
The moral of this story: if you’re ever sued for anything having to do with your home, promptly notify the company that insured your home at the time of the events, and ask the insurance company to defend the case.
For questions regarding any real estate matters, please contact Jonathan Azrael, Paul Schwab or Matthew Azrael.
Divorce – Real Property and Tax Issues
Couples who get divorced need to carefully consider the effect their divorce will have on real estate they acquired together while married.
Husbands and wives usually title their home, and perhaps other real property, as tenants by the entireties. This form of tenancy means the husband and wife own the property together. One spouse cannot sell or mortgage any interest in the property without the other signing the contract, deed or mortgage. A judgment or tax lien against only one spouse does not constitute a lien on real property owned as tenants by the entireties.
Only spouses can own property as tenants by the entireties. Once there is a divorce the parties are legally considered to own the real property as tenants in common. This tenancy means that each ex-spouse owns a one-half interest in the property. A property interest owned as tenant in common can be sold or mortgaged without the consent of the other tenant(s) in common. A judgment or tax lien against a party owning property as tenant in common is a lien against that party’s interest in the property.
Because divorce affects the way real property is titled, careful planning may avoid undesirable results. Let’s say husband and wife own a house worth $150,000. Creditor of husband holds a judgment against husband for $10,000. While husband and wife are married and own the home as tenants by the entireties, Creditor cannot enforce the judgment by attaching and selling the parties’ house. If husband and wife divorce, Creditor’s $10,000 judgment automatically becomes a lien on husband’s one-half interest as tenant in common. Creditor can enforce its judgment by attaching and selling husband’s one-half interest.
In the example cited, husband and wife could avoid a lien against the home by transferring it to wife before their divorce, as part of a property settlement. That way, the $10,000 judgment will never be a lien on the house.
For questions related to property or tax issues involved in a divorce, please contact Susan Terlep.