Adding persons to title to qualify for financing
Adding someone to the title of your property in order to obtain or qualify for a loan may cause a reassessment of the property under Proposition 13 unless certain conditions are met.
Does the person benefit?
The key question is whether the person(s) added to title gained a beneficial interest in the property. Beneficial interest means the right to
- enjoy the use of the property;
- derive income from it;
- receive consideration for being added to title;
- take tax deductions for the mortgage interest or property taxes while on title; or
- be able to share in the proceeds if the property is sold.
If the purpose of adding someone to title is to obtain a loan from that person, there are other ways to secure that lender's interest in the property without putting them on title. Banks and mortgage companies do not go on title with the property owner. Instead they require the owner to sign a separate deed of trust, also known as a mortgage, which gives the lender the right to foreclose on and sell the property if the owner stops making payments on the mortgage. Deeds of trust can be executed for the benefit of individuals such as parents or friends who are willing to lend money but want the security of the real property. A deed of trust by itself does not transfer beneficial use to the lender and does not trigger reappraisal under Proposition 13.
Additional person may be required
If the owner of property is not able to qualify on their own for a loan, banks and other lenders may require that additional person(s) go on title to secure the loan. If the co-signer, also known as co-borrower, has no beneficial interest in the property as described above, then the transfer is excluded from reassessment under California law. The details of why the additional persons went on title need to be communicated to the Assessor by an attachment to the Preliminary Change of Ownership Report (PCOR) that accompanies the deed. At a future date, when the property owner can qualify for refinancing on his or her own, the co-signer is usually taken off title in another deed. An attachment is also needed for the PCOR accompanying that refinancing deed.
As an example, Jane and Jim Doe own a vacant parcel on which they wish to build. They cannot qualify for a construction loan on their own so they add Jane's brother, Donald, on title to help secure financing. Six years later, after the home is built and Jane and Jim's financial situation has improved, they refinance the property with Donald going off title. Donald can not have put any of his own funds into the property, taken any tax deductions for mortgage interest or property taxes during the time he was on title and cannot receive any consideration from Jane and James for becoming a co-signer. As long as those conditions are met, there should not be a reassessment for either the deed where he went on title or the deed where he came off title, as long the proper explanation is given to the assessor's office.
Any time a property owner considers adding another person on title to their property, they should consult with a professional before executing such a deed.
Should you have any questions please contact Napa County Assessor-Recorder-County Clerk John Tuteur at 707.253.4459 or by e-mail firstname.lastname@example.org More articles can be found at http://www.countyofnapa.org/Assessor/