Friday, December 28, 2018

Mortgagee Assumes Mortgage

Can a mortgagee take a deed from the mortgagor for the mortgaged property and avoid paying the deeds excise tax by “assuming the mortgage?”

This came up on the deed recorded in Book 30634, Page 120, which was captioned “Deed in lieu of foreclosure.” A number of members of a family (all mortgagors) conveyed the property at 75 Smith Street to the mortgagee “in consideration of forgiveness of debt in the amount of $641,694.” There was no additional consideration.

Based on the rule that the amount of the debt forgiven is deemed monetary consideration and taxed accordingly, we assessed a tax due of $2,927.52.”

The person recording the document objected to that, stating that the mortgagee was in fact “assuming the mortgage.”

When property is conveyed and an existing mortgage is assumed by the grantee, the amount of the indebtedness is not taxable.

I don’t believe that the mortgagee can “assume” a mortgage that it holds. I think the interest conveyed with the mortgage merges with the equity of redemption when the property is conveyed to the mortgagee which would therefore extinguish the mortgage. (Whether it extinguished the debt is a question of contract between the parties).

Based on this, I assessed the tax stamp and suggested to the person recording it to seek an abatement from DOR. I’ve heard nothing more about this situation, however, I have seen other cases where the mortgagee takes a deed to the property and “assumes” the mortgage but I’m not sure whether this is permissible.

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