Who is responsible for the mortgage of a donated house? 4 Answers as of August 15, 2016

A member of our congregation recently passed away and had wished for their home to be donated to the church. There is an outstanding mortgage of $60,000. The estate will be going through probate, and the family is willing to donate the home.

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Law Ofices of Edwin K. Niles | Edwin K. Niles
Sadly, the owner of the loan doesn't usually care about death, probate, or anything else. They just want their money to be paid on time. If they are not paid, penalties may accrue, and eventually lead to foreclosure.
Answer Applies to: California
Replied: 8/15/2016
Law Offices of Robert P Bergman
Law Offices of Robert P Bergman | Robert P. Bergman
The property itself is responsible for the mortgage, because the property is the security for the loan. The failure of the new owner to either pay off the loan or else sell the property could lead to the loss of the property through foreclosure.
Answer Applies to: California
Replied: 8/15/2016
Law Offices of George H. Shers | George H. Shers
If the church takes a property subject to a mortgage it is also accepting "ownership" of the mortgage. What is being given is a property subject to a debt. If the deceased was giving his half interest in a property, would the estate have to first buy out the other half interest of course not.
Answer Applies to: California
Replied: 8/15/2016
WFB Legal Consulting, Inc.
WFB Legal Consulting, Inc. | William F. Bernard
The majority of real estate is encumbered by debt. The transfer of debt-encumbered property to charity is treated as a bargain sale. The relief of indebtedness triggers gain to the debtor or to his/her estate. The receiving charity must consider several factors when a donor offers a gift of debt-encumbered property. First, if the property can not easily be sold, the charity may determine that its best course of action is to defend its position in title by making payments on the mortgage. Second, if the debt is less than five years old and the donor has owned the property for less than five years, there is an acquisition indebtedness. If property not qualified for the "5 and 5" exception is received by a charity and then sold, the charity would pay tax on the sale since the sale would then be unrelated debt-financed income. There are two ways for the charity to avoid payment of unrelated business income tax. First, if the donor has owned the property for five years and the debt is five years old, a 10-year period is permitted to sell the property. Second, if the property fails the "5 and 5" test, then the charity may receive the property, pay the indebtedness and hold the property for at least 12 months. Since the definition of debt-financed income is property on which there has been debt within the 12-month period prior to the sale, the charity should be permitted to sell the debt-free property after the 12-month period with no unrelated business income tax. Otherwise, probate may allow an estate sale of the property in order to allow the proceeds of the sale to go to the church. That would cause the estate to deal with related tax issues as well.This gets a bit sticky, so I would seek out a tax specialist. Hope this is somewhat useful.
Answer Applies to: California
Replied: 8/15/2016
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