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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121182  
Subject: Re: Shared rental property Date: 9/10/2011 6:50 PM
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Just want to highlight another consideration. Refinancing a $250K mortgage note owed by three co-obligors with a new $210K mortgage note with two co-obligors and $45K of cash releases one person from liability for over $80K of debt. If there's no consideration for this liability release, it's a gift from the two co-obligor siblings to their brother. Gift tax reporting at least would be required (though no tax may be due unless lifetime credit has been utilized, etc.). If a gift of $80K+ is not intended, there ought to be some documentation of the released brother's obligation to make his brothers whole for a third of the mortgage debt when the property is sold. Otherwise, the release can result in cancellation of indebtedness income.

Furthermore, if there's no documentation that the released brother is still liable for his one-third share of the original mortgage, despite his name not appearing on the note, what happens if the property is sold a month later? Assume it sells for its market value of $300K, and after satisfaction of the mortgage note, there's $90K on the table (ignoring closing costs). One brother is legally entitled to $100K, which is one third of the gross proceeds (since he had no liability on the note). The other two --- the ones with more skin in the game --- not only get nothing but have to kick in $10K. Sound fair? Sounds like a lawsuit to me.

If you don't think this will happen because of the relationship between the sibling co-owners, think about what might happen if the released brother were to meet an untimely fate the day after closing the refi. How's the note signers' relationships with their sibling's heirs? And what if his financial situation gets to where he files bankruptcy, and his creditors force a sale of the property? Don't think they'd demand $100K?

Putting a partnership agreement in place would seem to me to simplify rather than complicate things. But that's just another random view.
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