New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

What is a short sale?  This a term which is being used with increasing frequency in today’s real estate market.

A short sale is when the proceeds from the sale of a home are not sufficient to fully pay off all outstanding debts which are secured by the property (mortgages) after first deducting the homeowner’s costs of selling the property.  In such instances, the selling homeowner can either bring funds to closing to make up the difference, or obtain approval from his mortgage holders to accept a reduced amount to satisfy his outstanding loans. 

Unless a homeowner is able to pay off all of the mortgages which are secured by his property, the homeowner will not be able to convey good title to a buyer.  If the homeowner is unable to obtain a sales price which enables him to pay off all loans and closing costs, and he does not have the funds to make up the difference, then he may want to try to obtain approval from his current lender(s) to accept an amount less than the full amount due on its mortgage.  For a lender, this may be acceptable to obtain repayment of a substantial amount of its loan and to avoid the costs and delay of foreclosing on the loan.  This will generally mean that the Seller will not receive any funds from the sale of his home.

In order to obtain such approval from a lender - which may or may not be granted - the homeowner needs to contact his lender(s) to determine what information they will need to make their decision.  This usually includes a financial statement of the homeowner, copy of a contract of sale, appraisal, and other pertinent documents.  Generally, a lender will not consider approving a short sale without a clear economic hardship on the part of the homeowner and an existing default or pending foreclosure.

Until recently, forgiveness of a debt under these circumstances, could trigger a taxable event according to the IRS.  This means that if a lender forgave a part of the mortgage debt by accepting a reduced amount in full satisfaction of the loan, then the amount forgiven could be deemed taxable income to the homeowner.  This was so even though the homeowner received nothing from the sale.  However, in December 2007 Congress passed the Mortgage Forgiveness Debt Relief Act of 2007.  This Act amends the Internal Revenue Code to exclude from gross income amounts attributed to a discharge of indebtedness incurred to acquire a homeowner’s principle residence.  The amount of the debt forgiveness can be up to $2.0 million.  Thus, a homeowner is now able to sell his home for less than what is owed on it without incurring an additional tax liability.   This exemption for forgiven debt, however, is only temporary and expires within three years.

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While property taxes always seem to be rising, there are some property owners who are entitled to reductions in their real property taxes due to deductions which are authorized by State law.

   
Senior citizens who are residents of the State and are of the age of 65 or more years and meet certain income requirements are entitled to a deduction of $250.00 (N.J.S.A. 54:4-8.41).

   
Citizens and residents of the State who are less than 65 years of age and are permanently and totally disabled, and meet certain income limitations are also entitled to a reduction of $250.00 in their real estate taxes.  (N.J.S.A. 54:4-8.41).

   
The surviving spouse/civil union partner of a deceased citizen and resident of this State who had been entitled to a deduction as a senior citizen or due to a permanent and total disability shall also receive the real property tax deduction so long as he or she shall remain unmarried (or has not entered into another civil union) and reside in the same dwelling for which the deduction had been granted, upon the same conditions.  This is so even if the spouse/civil union partner is under the age of 65 and not permanently and totally disabled, provided, however, the surviving spouse/civil union partner is 55 years of age or older at the time of death of his/her originally qualifying spouse/civil union partner.  (N.J.S.A. 54:4-841a).

   
Citizens and residents granted a deduction as a senior citizen, or for being permanently and totally disabled, as referred to above, are entitled to receive any homestead rebate or credit if they meet the compliance requirements.

 
In order to obtain the deductions referred to above, a qualifying resident must file a written application requesting the deductions. (N.J.S.A. 54:4-8.42).  Forms for this may be obtained from the local tax assessor.  Once obtained, the person who has been allowed a deduction is required to file an annual statement of his/her income on forms obtainable from their local tax assessor.

   
Citizens and residents of this State who are honorably discharged as war veterans, and their surviving spouses/civil union partners, (provided they have not remarried or entered into another civil union) are also entitled to a $250.00 deduction in their real property taxes. (N.J.S.A. 54:4-8.11).  This deduction does not have any income limitation requirements.  Written application must be submitted on forms provided by the local tax assessor to obtain this deduction.  Once a claim has been filed with and allowed by the tax assessor, the deduction shall continue in force from year to year without the need to file any further claim forms unless so required by the tax assessor.  (N.J.S.A. 54:4-8.16).  In certain cases, New Jersey state law provides for a total exemption from real property taxation for honorably discharged veterans suffering certain disabilities and their qualifying spouses/civil union partners. (N.J.S.A. 54:4-3.30).

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When selling a home a buyer’s title search may uncover an old mortgage of the homeowner - or a prior owner, that was not discharged of record.  Frequently the mortgage has been paid off, but unfortunately just not discharged of record in the county clerk’s office.  There are ways to discharge such old mortgages depending on the particular situation.

The easiest is if the original mortgage was discharged and returned to the homeowner’s possession and the homeowner can locate it.  The original mortgage, marked as paid and discharged, can then be sent to the county clerk’s office for recording.

If the discharged mortgage has not been recorded, and cannot be located, the mortgage can be discharged of record by the filing of an affidavit provided the provisions of N.J.S.A. 46:18-11.5 et seq. apply.  The New Jersey Legislature enacted this law in 1999 to provide a relatively simple and expeditious means of removing mortgages from the record when a lender has failed to have a mortgage discharged, or canceled of record, in a timely manner.

Pursuant to this law, an attorney-at-law or licensed title insurance producer who has caused a “residential mortgage” to be paid can obtain its discharge by filing a detailed affidavit which sets forth the steps taken to obtain a discharge of the mortgage from the lender.  Specifically, the person signing the affidavit (the “affiant”) must attest to the following:
    1. Payment was made to the lender in accordance with a current, written pay-off letter, as defined by ... the Act;
    2.  the affiant knows that the lender received the payment;
    3.  a notice was sent to the lender by registered or certified mail at least 30 days after payment was received, advising it of the affiant’s intention to cause the mortgage to be discharged by affidavit;
    4.  a second notice was sent to the lender at least 30 days after the first notice was received; and
    5.  at least 15 days have elapsed since the lender received the second notice.

The affidavit with the above information is then attached to a discharge prepared by the affiant, and recorded.

If the facts surrounding the payoff of an old mortgage do not fit the requirements of N.J.S.A. 46:18-11.5 et seq., then a court action under N.J.S.A. 2A:51-1 et. seq. can also be commenced.  This type of action requires the filing of a complaint in Superior Court and thus is a more time consuming and costly endeavor.
 
Some mortgages are old enough that they are no longer enforceable.  Mortgages which have a maturity date at least 20 years last past, are no longer enforceable.  The New Jersey court ruled in Security National Partners v. Mahler, 336 N.J. Super. 101 (App. Div. 2000) that the statute of limitations for enforcement of a mortgage is 20 years.  Thus, a lender’s right to enforce a mortgage expires 20 years after the last payment is due.

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Upon the sale of residential real estate, many Sellers are surprised to learn that the transfer is subject to a New Jersey Realty Transfer Fee.  This is a tax imposed on Sellers by the State of New Jersey pursuant to N.J.S.A. 46:15-5 et seq.  In certain instances the amount can be significant.

First enacted in 1968, and comprised of a modest fee, the Realty Transfer Fee law has been amended several times, most recently in 2004.  Each time, not surprisingly, the Realty Transfer Fee has been increased on higher priced real estate.

The Realty Transfer fees are calculated on a sliding scale, with the rate per $500.00 of sales price increasing as the sales price increases.  The table below summarizes the standard rates:

    Sales Price                        Realty Transfer Fee
    $500.00 to $350,000.00                $2.00 to $2,105.00
    $350,000.00 to $1.0 million                $2,105.00 to $9,575.00
    $1.0 million to $2.0 million                $9,575.00 to $21,675.00
                and $6.05 per $500.00 in excess of $2.0 million

A reduced Realty Transfer Fee is available to senior citizens, blind persons, and disabled persons on the sale of one-or two-family residences which they own and occupy, and on the sale of low and moderate income housing.

Those reduced fees are:

    Sales Price                        Realty Transfer Fee
    $500.00 to $350,000.00                $.50 to $650.00
    $350,000.00 to $1.0 million                $650.00 to $4,675.00
    $1.0 million to $2.0 million                $4,675.00 to $11,475.00
                and $3.40 per $500.00 in excess of $2.0 million

Certain deed transfers are exempt  from the Realty Transfer Fee under N.J.S.A. 46:15-10.  The most common of these are:

    •    Deed for consideration of less than $100.00;

    •    Deed between husband and wife, or parent and child;

    •    Deed by an executor or administrator of a decedent to a devisee or heir to effect distribution of the decedent’s estate in accordance with the decedent’s will or the intestacy laws;

    •    Deed recorded within 90 days following the entry of a divorce decree which dissolves the marriage between the grantor and grantee;

    •    Deed conveying a cemetery lot or plot;

    •    Deed in specific performance of a final judgment;

    •    Confirmatory or corrective deed; and

    •    Deed of a receiver, trustee in bankruptcy or liquidation, or assignee for the benefit of creditors.       

In 2004, legislation was also passed requiring non-resident Sellers to file an estimated Gross Income Tax on the transfer of real property as a condition to recording the transfer.  The estimated Income Tax payment is determined by multiplying the Seller’s gain, as computed for tax purposes, times the highest Gross Income tax rate of 8.97%.  However, in no case may the estimated payment be less than 2% of the sales price paid.

Finally, there is a Realty Transfer Fee due from the Buyer for purchases of residential property in excess of $1.0 million.  This is commonly referred to as the “Mansion Tax” and is 1% of the purchase price.  Thus, if the “Mansion Tax” applies, the minimum transfer tax paid by the Buyer is $10,000.00.

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It used to be that homeowners went to their local banker to borrow funds to purchase a new home.  The local banker usually knew the home buyer as well as the property and its value.  If the homeowner later encountered trouble making timely payments, he or she would go back to the  bank which held their mortgage, meet with their banker, and together they would try to work out a solution acceptable to both sides to forestall a possible foreclosure. 

Now, however, it is not unusual for a home buyer to use the internet or a mortgage broker to find a lender for them with whom they have had no prior contact.  And thus begins a confusing journey for a homeowner who may someday be in financial distress and need to find the ultimate holder of their mortgage. 

In recent years a process called “securitization” has made mortgages much more easily available to home buyers.  At the same time, this process has made it much more difficult for a borrower to locate the ultimate holder of their mortgage with authority to modify the terms of their loan. 

The process begins when a borrower  goes to a mortgage broker or lender who originates their loan.  The loan is then assigned to a servicing company which collects the homeowner’s mortgage payments which are available for distribution to investors.  A Wall Street investment bank then gathers thousands of these loans and packages them together to create  mortgage-backed securities which generate an income stream from the loan payments to be distributed to investors.  The securities are in the form of investment trusts.  Once these loans are gathered and placed in a trust, the trust issues bonds which are sold to investors.   A trustee bank oversees the trust, including the servicers of the loans, on behalf of investors.  At each stage - the gathering of loans into a trust, the servicing of loans, there are agreements setting forth the responsibilities of the overseeing party.  This agreement binds the servicer of the mortgage and controls what a servicer can do to assist borrowers who are behind in their loan payments.  Because the borrower makes their mortgage payments to the servicer, the servicer is their primary contact in this process.

It is the limitations which are frequently imposed on a servicer to modify existing loans in a trust which have been creating difficulties for buyers in distress who are attempting to resolve their problems with their lender prior to a foreclosure action being instituted.  Such borrowers are finding it increasingly difficult to find a party who has the authority to make substantive modifications to their mortgages to alleviate or “work out” a borrower’s immediate financial problems. 

The extent to which mortgages are now securitized (60% of the home mortgages made in the U.S. in 2006 went into securitized trusts) has added to the difficulties the mortgage industry is currently facing.  Often, there is no easy way to find a responsible party who can help a borrower find a solution when a borrower is facing financial distress, leaving the commencement of a foreclosure action more likely.

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One of the items commonly adjusted at real estate closings is municipal real estate taxes.  Real estate taxes are billed on a quarterly basis with a quarterly tax payment being due on the first day of the middle month of the quarter.  Thus, first quarter taxes, covering January, February and March are due February 1st.  Second quarter taxes, covering April, May and June are due May 1st.  The due date for third quarter taxes is  August 1st and fourth quarter taxes, November 1st. 

The reason municipal real estate taxes are adjusted at closing, i.e., apportioned between the buyer and the seller as of the day of closing, and paid at closing is because the taxes become a lien on the property on and after the first day of January of the year for which they are assessed.  N.J.S.A. 54:5-6.

Unless the sales contract provides otherwise, municipal taxes are adjusted based on the current year’s assessment.  If taxes for the current year have not yet been determined at the time of closing then the amount of the taxes for the last assessed year will be used as the basis for computing the apportionment between the buyer and seller.  N.J.S.A. 54:4-56.

While municipalities should have their budgets and tax rates in place by July 1st, sometimes they do not.  This means that taxes are frequently adjusted based on the prior year’s taxes, even after July 1st.  The 1st and 2d quarter tax bills are actually estimates for the current tax year.  Once the municipality’s budget and tax rate are adopted, the full annual taxes are assessed and the 3d and 4th quarter final bills are sent out.  The 3d and 4th tax quarter bills, when added to the 1st and 2d quarter estimated bills, total the full year’s taxes.  Usually, the municipality sends out the estimated tax bills for the 1st and 2d quarters along with the 3d and 4th quarter final bills.

When improvements or newly constructed homes are built after the date for the regular tax assessment by the municipality, an added assessment is made and  billed in October of the year in which the improvement is completed provided it is completed before July 1st.  The added assessment usually commences the first full month following the issuance of a Certificate of Occupancy or Approval which is proof of the completion of the improvement.  If the improvement is completed after July 1st, then the bill for the added assessment taxes for the improvement is usually sent out to the homeowner  in October of the following calendar year.

Frequently, homeowners pay their real estate taxes by means of a monthly escrow payment to their mortgage company, which in turn makes the quarterly tax payments for them.  As a result, many homeowners may be unaware of the method by which the municipality bills their real estate taxes.

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Adjoining property owners frequently encounter overhanging branches from a neighbor’s tree, hedge or other vegetation.  Although the base of a tree may be in your neighbor’s yard, when branches, limbs or roots cross over the boundary line, they may constitute a nuisance.

    Through two New Jersey Supreme Court cases, our Supreme Court recognized that encroaching branches may constitute an actionable nuisance and that a common law right exists to cut off overhanging branches to the property line, but no further. 

    In Ackerman v. Ellis, 81 N.J.L. 1, 79 A. 883 (Sup. Ct. 1911) the New Jersey Supreme Court held that tree branches which overhang the premises of another may constitute a nuisance. In such instances, the person over whose land they spread is entitled to an action for damages against the person responsible for their presence there.

    In Wegener v. Sugerman, 104 N.J.L. 26, 138 A. 699 (Sup. Ct. 1927) the New Jersey Supreme Court held that a landowner may lawfully cut overhanging branches of trees or hedges, but may not destroy the tree or hedge on the neighbor’s land.  This form of self-help was found to be acceptable to the Court.

    The New Jersey Appellate Division addressed damage caused by tree roots to a neighboring property owner’s wall in D’Andrea v. Guglietta, 208 N.J. Super. 31, 504 A.2d. 1196 (App. Div. 1986).  That case held that damages were properly awardable in the absence of proof that the wall owners were aware of tree roots in the vicinity of their wall before it was damaged.  The encroachment, this time by tree roots, was recognized as a nuisance.  However, this Court distinguished between tree branches and tree roots, which are largely underground, evident only upon digging down, their extent and girth uncertain and unpredictable, they are not commonly pruned or otherwise tended and their severance may endanger the tree’s stability in high winds and rainstorms.  208 N.J. Super. at 34.  The Court found that the “relatively uncomplicated law governing invasion of adjoining property by tree branches may not be fairly applicable under all circumstances to tree roots”.  208 N.J. Super. at 35.  The Court held that injury to an adjoining property caused by the roots of a planted tree was actionable as a nuisance and damages were recoverable, in the absence of any pleading or proof that the damages were avoidable or that complaining party had “come to the nuisance.”  208 N.J. Super. at 36.  In D’Andrea, when the adjoining property owners installed their wall, they saw no evidence of the neighbor’s trees roots in the vicinity of their wall, nor was there proof before the Court that they could have foreseen the direction and extent of the tree roots’ growth.  It should be noted however, that the D’Andrea case did not involve self-help, but only a claim for damages.

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When selling your home, it is important to be able to convey marketable title.  Marketable title is a title free from encumbrances and any reasonable doubt as to its validity.  Some of the factors which can affect the marketability of title are various statutory liens.  Some of the most common ones include:

    Existing Mortgages.  All recorded  mortgages will act as a lien against the property.  This includes any home-equity loan and lines of credit which are secured by a mortgage in addition to primary mortgages.  Payoff statements can be obtained from the lender prior to closing so that the mortgage lien can be paid off from the closing proceeds.  It is important that home-equity and line of credit accounts be terminated prior to or at closing and representations be made by the borrower that no additional withdrawals have been made beyond the amount indicated in the payoff statement.

    Existing Judgments. State and Federal judgments entered in New Jersey state courts or Federal District Courts of New Jersey will act as liens against the property.  This is because all real estate is liable to be levied upon and sold by executions to be issued on judgments obtained in any court of record of New Jersey for the payment of money when the judgment is properly docketed.  Judgments can be discharged by Court order, filing a warrant of satisfaction with the appropriate county clerk which is signed by the judgment holder or his attorney of record which authorizes the county clerk to satisfy the judgment of record, or by the acknowledgment of satisfaction on the record by the county clerk after the sheriff or other officer returns an execution of judgment issued as satisfied.

    Real Estate Taxes and Assessments.  Municipal real estate taxes, as well as municipal improvement assessments, water charges and sewer charges all act as liens against the property and must be paid off at closing.  In addition to a search for municipal liens, a buyer should also perform a search for prospective assessments.  This is because municipal improvements are not liens against the property until the property is actually assessed.  However, this may be long after the improvement has been completed and the assessment passed.

    State and Federal Tax Liens. Liens can be imposed against a property for various death taxes, i.e., New Jersey Transfer Inheritance Taxes, New Jersey Estate Taxes and Federal Estate Taxes incurred as a result of a homeowners death.  These liens can be discharged upon the payment of the taxes, if any, and the issuance of a tax waiver or discharge of lien from the appropriate taxing authority.

Whether you are a seller concerned about what debts have to be paid at closing or a buyer who is seeking title to a property “free and clear of any liens” it is important to know to what extent such liens affect the marketability of title to your property.

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It’s not uncommon for an executor or administrator of an Estate to find that the decedent has left a house which needs to be sold by the Estate.  In addition to the normal requirements for selling a house, there are some special issues to consider when the seller of real estate is the estate of a decedent.

Real estate held by a decedent’s estate is subject to liens for the payment of any New Jersey Transfer Inheritance Tax, New Jersey Estate Tax, Federal Estate Tax and debts of the decedent.  

The N.J. Transfer Inheritance Tax is a state tax imposed on the transfer of property  made upon the death of a New Jersey resident and certain non-residents, or made by such a decedent in contemplation of death. N.J.S.A. 54:34-1 et seq.  The Inheritance Tax lien lasts for a period of fifteen years following the date of death. N.J.S.A. 54:35-5.  This lien is discharged when the tax is paid or a bond given to the State.  The N.J. Division of Taxation issues a tax waiver which is then recorded in the county clerk’s office of the county in which the property is situated.  Tax waivers can be obtained before a return has been audited by the State upon submission of the estate’s Inheritance Tax return and payment of an amount deemed sufficient by the Inheritance Tax Bureau of the N.J. Division of Taxation.

New Jersey also imposes an Estate Tax on estates of  resident decedents dying after December 31, 2001  if the gross value of the estate exceeds $675,000 .  N.J.S.A. 54:38-1 et seq.  A New Jersey estate may be subject to the N.J. Estate Tax even if it is not subject to the Federal Estate Tax.  The N.J. Estate Tax also becomes a lien against property.  The N.J. Estate tax lien exists as a lien against the property as of the date of decedent’s death until paid.  N.J.S.A. 54:38-6.  This lien can be discharged in the same manner as the N. J. Transfer Inheritance Tax lien by the issuance of a tax waiver from the N. J. Division of Taxation.

The Federal Estate Tax may be imposed on estates in the amount of $2.0 million for decedents dying in 2007 ($3.5 million commencing 2008). The Federal Estate Tax becomes a lien on the property in the estate for ten years from the date of death. I.R.C. §6324 (a)(1).  To discharge the lien, a Certificate of Release of Estate Tax Lien can be obtained from the IRS and recorded with the County Clerk in the county in which the property is located.

If a tax waiver or release of lien cannot be obtained prior to closing, the buyer’s title company will frequently agree to escrow funds to cover any possible liability and to insure that the selling estate will obtain and record the waiver or release.

Finally, real estate of a decedent is liable for the debts of the decedent for one year after date of death.  N.J.S.A.  3B:22-22.  If the property is being sold within a year of decedent’s death, the buyer’s title company with generally require information concerning the assets and debts of the estate and a bond from the executor before agreeing to insure the property.        

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It is not unusual for a buyer and seller to want to close on their house sale, but there remains obligations on the part of the buyer or seller to fulfill.  It is always imperative that whatever the agreement is for post-closing obligations, that it be reduced to writing and signed by each party involved so that all parties have a clear understanding of what their agreement is.  This will help to avoid any later misunderstandings or disputes over what each party’s obligations were.

Some agreements which address common issues include:

Use & Occupancy Agreements: Sometimes a Seller seeks to remain in the home after closing and the Buyer agrees to this.  In such event, an agreement commonly called a Use & Occupancy Agreement should be prepared.  It should spell out what daily charges the Seller will be paying for the right to remain, what other charges, such as utilities, telephone, cable, the Seller will be paying, the date Seller will be vacating the premises and what happens if the Seller vacates either earlier or later than that date.  In addition, the Agreement should identify what other obligations the Seller may have such as providing proof of liability insurance, responsibilities for maintaining the property, and what condition the property is to be in when the Seller finally vacates.   The parties should determine if they want to hold funds in escrow in the event of any damage to the property while Seller remains (and when the Seller actually moves out), and/or for other charges, and what happens to the escrow if any damage or charges exceed the amount of the escrow.

Inspection Escrows: Sometimes the parties agree that the Buyer has a right to perform an inspection - let’s say of a pool or air conditioning system after the closing.  This can occur when the closing is in the winter and the weather does not permit a proper inspection.  In such an instance the parties should be very specific about the type of inspection, the time period within which it must occur, the amount to be held in escrow, when to release the funds and what occurs if the cost of any repairs is more than the amount held.

Repair Escrows: Sometimes the Seller agrees to make a repair which cannot be completed by the closing date.  Again, the Agreement should be in writing and the parties should provide a detailed summary of what the Seller is obligated to do and when.  Provisions should be made in the event of a delay in completion of the repair.  And again, if an escrow is held, the Agreement should provide what occurs if the cost of repair exceeds the amount of the escrowed funds.

What’s important to remember is to always put the Agreement in writing and make provisions in the event things don’t go according to plan!

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