Can an Intra-Family
Mortgage Be Ported
to a New Property?
Can an Intra-Family Mortgage Be Ported to a New Property?
Collateral Substitution, Treasury Regulation § 1.1001-3, and the 90-Day Rule
By Timothy Burke, National Family Mortgage ®
For informational purposes only; not tax or legal advice.
Executive Summary
During the period of historically low interest rates, many families formalized intra-family mortgage loans at Applicable Federal Rates (AFRs) near record lows. As housing needs evolve, an increasing number of borrowers wish to move or upgrade homes while preserving the original interest rate on their existing family loan.
This article examines whether an intra-family mortgage can be “ported” to a new property by substituting collateral–without creating a new loan or triggering a new AFR. It analyzes the relevant federal tax framework, including Treasury Regulation § 1.1001-3 and IRS Publication 936, and outlines a practical structure for executing such a transaction while maintaining continuity of the original debt.
For the related ‘rate reset’ modification question families face when AFRs fall, see Refinancing vs. Amending an Intra-Family Loan.
Why Families Are Asking About Mortgage Portability
Mortgage portability–the ability to move an existing loan from one property to another–is common in certain international markets but rare in U.S. residential lending. Institutional lenders typically require full repayment when collateral is sold.
In contrast, private intra-family lending allows greater contractual flexibility, subject to compliance with federal tax rules. Families that originated loans at very low AFRs understandably seek ways to preserve those terms when a borrower sells one home and purchases another.
The Core Concept: Substitution of Collateral
In an intra-family mortgage, the promissory note evidences the debt, while the mortgage secures that debt with specific collateral. If the borrower and lender agree to substitute one property for another–without changing principal, interest rate, maturity, or payment schedule–the transaction can potentially be structured as an amendment rather than a new loan.
The central question is whether such a change constitutes a “significant modification” under federal tax law.
Treasury Regulation § 1.1001-3 and Significant Modifications
Treasury Regulation § 1.1001-3 governs when a modification of a debt instrument is treated as an exchange for a new debt under Internal Revenue Code § 1001.
The regulation provides, in relevant part:
“The substitution or release of collateral, or the addition or deletion of a co-obligor, is not a significant modification unless it results in a change in payment expectations.”
If repayment expectations are not materially altered, a substitution of collateral alone does not create a new debt instrument and does not require re-pricing the loan at the AFR in effect at the time of the modification.
Scope of the Regulation
Treasury Regulation § 1.1001-3 applies broadly to debt instruments of all types. It contains no limitation based on whether the lender is an individual or an institution, nor does it impose income, asset, or size thresholds.
The regulation is often encountered in corporate or securitized debt contexts, which has led some practitioners to assume it applies only to publicly traded companies. That assumption arises from practice patterns, not from the text of the regulation itself.
The $100 Million Threshold and Common Confusion
Some practitioners recall a $100 million threshold in connection with debt modifications. That threshold does not appear in § 1.1001-3.
Instead, it appears in the Original Issue Discount regulations–particularly Treasury Regulation § 1.1273-2(f)–which define when a debt instrument is considered “publicly traded” for valuation purposes. That rule simplifies valuation mechanics for large, marketable debt instruments.
While intra-family loans virtually always fall well below that threshold and are therefore treated as non-publicly traded for valuation purposes, the threshold does not exempt such loans from the modification analysis under § 1.1001-3.
IRS Publication 936 and the 90-Day Rule
IRS Publication 936 addresses when mortgage interest is deductible as home acquisition debt. It provides that a debt may qualify as acquisition debt even if it is not initially secured by a qualified home, so long as the home is purchased within 90 days before or after the debt is incurred.
Publication 936 also states:
“If the debt is later secured by the home, it may qualify as home acquisition debt after that time.”
Notably, Publication 936 does not state that collateralizing a loan requires a change to the loan’s interest rate. Its focus is on the timing of deductibility, not on the validity or re-issuance of the underlying debt.
This distinction is critical in evaluating a temporary de-collateralization followed by re-collateralization within a defined window.
A Practical Framework for Porting an Intra-Family Mortgage
A portability structure consistent with the above authorities may involve the following sequence:
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The borrower sells the original home.
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The lender executes a release of the mortgage lien on that property, explicitly stating that the debt remains outstanding.
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The promissory note is amended to reflect a temporary unsecured period, with a covenant requiring re-collateralization within 90 days.
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The borrower purchases a new home within that period.
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The lender and borrower execute a second amendment and a new mortgage securing the original note with the new property.
Throughout this process, the loan’s principal balance, interest rate, maturity, and payment schedule remain unchanged.
Timing and Continuity Considerations
The viability of this structure depends on continuity and documentation.
If the interval between sale and purchase exceeds 90 days, if no covenant requiring re-collateralization within that period is included, or if the temporary unsecured period is viewed as materially altering repayment expectations, the IRS could treat the transaction as a new issuance. In that case, the AFR in effect at that later date could apply.
Careful planning, clear documentation, and professional review are essential.
Frequently Asked Questions
Is a “portable” intra-family mortgage explicitly authorized by the IRS?
No specific IRS ruling addresses “portable” intra-family mortgages by name. The analysis relies on existing regulations governing debt modifications and acquisition debt.
Does releasing a mortgage lien always extinguish the debt?
No. A properly drafted release can discharge the lien while expressly preserving the underlying debt.
Does re-collateralizing a loan require resetting the interest rate?
Federal guidance does not state that collateralization alone requires re-pricing. The analysis turns on whether the modification creates a new debt instrument.
Why do some advisors believe § 1.1001-3 applies only to public companies?
Because the regulation is most frequently cited in corporate finance contexts, even though its text applies to all debt instruments.
Does National Family Mortgage ® currently offer a portable mortgage product?
National Family Mortgage® does not currently offer a standardized “portable mortgage” product. The firm continues to evaluate whether such structures can be responsibly supported within its educational and documentation framework.
Conclusions
A properly structured substitution of collateral on an intra-family mortgage can, under existing federal tax guidance, preserve the original loan and its AFR-based interest rate. Treasury Regulation § 1.1001-3, IRS Publication 936, and related authorities collectively support the view that collateral substitution alone does not necessarily create a new debt instrument.
Execution risk remains. Success depends on timing, documentation, settlement coordination, and professional review. Families considering this approach should proceed carefully and with appropriate advice.
Technical Appendix: Settlement and Title Considerations
Settlement agents and title underwriters are accustomed to standard “paid in full” mortgage satisfactions. A release that leaves the debt outstanding may appear unfamiliar and raise concerns about future title examination.
Distinguishing Lien Release from Debt Satisfaction
A full satisfaction extinguishes both the lien and the debt. Recording such an instrument would terminate the loan and undermine continuity.
To preserve the loan, the instrument should release only the lien and clearly state that the debt remains outstanding.
Recommended language:
“This release discharges only the lien of the mortgage recorded at [reference]. The underlying debt evidenced by the promissory note dated [date], as amended, remains outstanding and enforceable.”
Lender Instructions
Settlement agents are more comfortable when acting under explicit lender direction. A brief written instruction confirming the intent of the release can reduce hesitation and underwriting concern.
Avoiding Workarounds
Recording a full satisfaction and attempting to re-establish the debt afterward creates substantial tax and legal risk. Continuity depends on avoiding any public statement that the debt has been paid in full.
About the Author
Timothy Burke is the founder of National Family Mortgage ®, an online company focused on helping families document and support compliant intra-family mortgage loans and seller-financed home transactions. His work focuses on proper documentation, alignment with applicable federal tax rules, and practical implementation considerations for families and their professional advisors navigating private family financing.
Families and their advisors should consult applicable statutes, regulations, case law, and professional guidance when applying these principles to specific transactions.
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