The difference between a promissory note and a mortgage lien
Attorney Tom Olsen: Let’s go now to Barbara in Longwood. Barbara, you’re on News 96.5. Go ahead.
Barbara: Hi. Yes. My husband is buying a house for my son. He is in his 40s. he wants the son to own it, and then he wants to sign it up. It’s the contract’s in his name but he’s going to put the deed in my son’s name, and then he wants my son to pay for it though. His idea is to have the son to sign a promissory note to pay him with interest.
Attorney Tom Olsen: Okay.
Barbara: Is that a good way to do it? Or is there a better way to set it up and also how should the deed?
Tom Olsen: Probably not, Barbara. Barbara, is your husband to pay all cash for this?
Attorney Tom Olsen: Okay. So my concern and you guys might have the same concern is that if you buy all cash, you put it in your son's name, it is 100% his. He could go out and sell or refinance that property before you even knew what happened.
Barbara: Yes, we knew that.
Attorney Tom Olsen: If your husband wants to maintain some kind of control over this property to make sure that your son doesn't sell it, then you might want to put both your son's name and your husband's name on the deed.
But let’s say that you’re okay with your son's name being on that property only then is a promissory note good enough? In my opinion, Barbara, the answer is no. That promissory note should be secured by a mortgage lien against the property. All right. That way for someone to sell the property, he could not sell it without paying off your husband.
The other advantage of that, about that is that if it's a straight promissory note, the interest that your son pays would not be a tax deduction for him on his income taxes, the interest expense. If you secure it by a mortgage lien against the property, the interest expense on that loan will be a tax deduction to your son.
So there's a couple of reasons to go farther than simply a promissory note. I'm recommending you have a promissory note and a mortgage deed lien against the house. Barbara, we’d be pleased to assist your husband with that.
Barbara: To have both. And then how should the contract, yes, like should it be tenants in common, then or?
Attorney Tom Olsen: We may agree that we may put it in your son's name only for securing about mortgage lien, but if we’re going to put your husband's name on it or even your name too, my recommendation would be that you would all be joint tenants with right of survivorship. I'm not recommending that route. I think we came up with a better plan but if you do put names on it, Barbara, I would want you to be joint tenants rights of survivorship.
Barbara: Okay. The other question is then if his name’s on it, can my son – he wants my son to be able to still claim it as a homestead.
Attorney Tom Olsen: Yes. When you have two or more owners of a property, even if one does not live there, the one that does live there can get full homestead exemption for savings on real estate tax purposes as long as they own it, as joint tenants rights of survivorship. So if we put your husband's name on there, they are co-owning, your husband doesn't live there, but as long as they are joint tenants rights of survivorship, your son will be allowed to claim full homestead exemption for real estate tax savings purposes.
Barbara: Okay. All right. Okay. And we are thinking of contracts of deed, would that be a good route instead or not?
Attorney Tom Olsen: No, people don't use those at all. That doesn't apply to you guys. So, Barbara, this may be a little overwhelming with you, but you know real estate, this is what I do all day every day. My recommendation is you call me. I’d be happy to assist you with this.
Barbara: So I used to sell real estate, and that’s why I had some concerns. It’s not a matter of transfer to my son. It’s just a matter of legally and tax-wise the best route.
Attorney Tom Olsen: And I can assist you with that, Barbara. So I'd love to assist you guys. You're welcome to call me on my office next week at 407-423-5561.