Why Proper Lien Recording Matters in Family Loans

 

How Recording a Mortgage or Deed of Trust Affects Tax Treatment, Legal Priority, and Family Expectations

 

By Timothy Burke, National Family Mortgage ®
For informational purposes only; not tax or legal advice.

 

Executive Summary

When family members lend money to help purchase or refinance a home, the loan is often intended to function like a traditional mortgage. In these situations, properly recording a lien–such as a mortgage or deed of trust–plays a critical role in clarifying rights, expectations, and tax treatment.

While a family loan can exist without being secured by real property, failing to record a lien when a loan is intended to operate as a mortgage increases legal uncertainty, complicates tax analysis, and can create misunderstandings among family members. Recording a lien does not make a family loan adversarial or inflexible; it provides objective structure that can reduce the need for conflict if circumstances change.

This article explains why lien recording matters in family loans, how it affects tax and legal analysis, and why recorded security often changes outcomes in ways unsecured arrangements cannot.

 

What Is Lien Recording?

Lien recording is the process of filing a mortgage, deed of trust, or similar security instrument in the public land records of the county or jurisdiction where the property is located.

Recording a lien:

  • Establishes the lender’s secured interest in the property

  • Provides public notice of that interest

  • Determines priority relative to other creditors

  • Aligns the transaction with conventional mortgage practices

Recording does not alter the private nature of a family loan. It documents how the parties intend the obligation to function in relation to the property.

 

Family Loans Can Be Secured or Unsecured

A family loan does not need to be secured by real estate to be legally enforceable, but the absence of security may increase the risk that the transaction is later treated as a gift rather than a loan.

  • Unsecured promissory notes can constitute valid debt

  • Secured loans involve collateral, typically the residence being financed

The distinction is not whether a loan exists, but how the loan is expected to be enforced and administered over time. When a loan is intended to operate as a mortgage–particularly when mortgage-interest treatment, creditor priority, or long-term repayment expectations matter–recording a lien becomes significantly more important.

 

Enforcement Risk: Unsecured Notes vs. Recorded Mortgages

An unsecured promissory note may be legally enforceable, but enforceability on paper does not always translate into practical leverage. When repayment is disputed, unsecured family loans often require affirmative legal action to resolve disagreements. This issue most often arises when parents help children purchase a home using private financing.

Practical illustration

Consider a situation in which parents lend a substantial sum to their child and the child’s spouse to purchase a home, documented by an unsecured promissory note. Years later, the marriage ends. The former spouse disputes repayment, claiming a lack of understanding of the obligation or characterizing the funds as a gift rather than a loan.

Even if the promissory note is legally valid, resolving this type of dispute may require litigation, testimony, and legal expense. Family lenders are often reluctant to pursue formal enforcement against former in-laws, particularly when doing so risks prolonged conflict and emotional strain.

When the loan is secured by a properly recorded mortgage, the dynamics change. The obligation is tied directly to the property, and the property generally cannot be sold or refinanced without addressing the recorded lien. This structure often reduces the need for adversarial enforcement because repayment must be resolved as part of any property transaction.

The distinction is not whether enforcement is possible, but how much friction is required to reach resolution.

 

Why Lien Recording Matters for Tax Purposes

Mortgage interest considerations

For a loan to be treated as a mortgage for federal tax purposes, the debt generally must be secured by a qualified residence and comply with applicable interest requirements, commonly evaluated by reference to Applicable Federal Rate (AFR) rules.

Failing to record a lien may undermine the argument that a loan qualifies as a mortgage, even when the parties intended it to function as one. When interest and security are not aligned with federal expectations, the transaction may also implicate the imputed interest rules.

Evidence of bona fide debt

From a tax perspective, the IRS evaluates family loans based on objective evidence. Recording a lien:

  • Reinforces the existence of a real repayment obligation

  • Demonstrates intent to secure repayment

  • Supports the lender’s expectation that repayment will occur

Recording alone does not guarantee favorable tax treatment, but its absence can raise questions when other facts are ambiguous.

 

Recordkeeping, Estates, and Inter-Sibling Fairness

Unsecured promissory notes rely heavily on private recordkeeping. If a note is lost, forgotten, or unknown to other family members, its existence may be difficult to establish later–particularly after the lender’s death.

Estate administration considerations

For example, parents may make an unsecured personal loan to one child without informing other siblings. Years later, when the parents pass away, the borrower may be the only person aware of the outstanding obligation. In the absence of clear, discoverable records, estate administration may proceed without accounting for the loan, effectively resulting in an unequal distribution among beneficiaries.

A recorded mortgage, by contrast, appears in public land records and generally cannot be released without action by an authorized representative of the lender, the lender’s estate, or a surviving trustee. This public record helps preserve institutional memory and ensures that outstanding obligations are addressed as part of estate administration rather than overlooked or disputed later.

 

Legal Priority and Creditor Rights

Lien recording determines priority among creditors. Priority matters when:

  • There are multiple loans against a property

  • The borrower refinances

  • The borrower experiences financial distress

  • The property is sold or transferred

An unrecorded lien may be subordinate–or unenforceable–against later creditors or purchasers without notice. Recording protects the lender’s position in ways private agreements cannot.

 

Recording Does Not Eliminate Flexibility

Some families avoid recording liens because they fear losing flexibility. Recording a lien does not prevent families from:

  • Offering temporary forbearance

  • Modifying repayment terms

  • Refinancing or releasing the lien later

  • Forgiving part or all of the loan

As with any mortgage, flexibility remains possible when changes are documented clearly and intentionally.

 

Common Misunderstandings

“Recording a lien makes the loan adversarial.”
Recording documents expectations; it does not change the family relationship.

“If we trust each other, we don’t need a lien.”
Trust and documentation serve different purposes. Public records protect against future uncertainty.

“We can always sort it out later.”
Delayed resolution often increases cost, conflict, and complexity.

 

Practical Checklist

When a family loan is intended to function as a mortgage, consider:

  • Executing a written promissory note

  • Preparing a mortgage or deed of trust

  • Recording the lien promptly

  • Aligning payment behavior with documented terms

  • Documenting any later changes or releases

These steps help align intent, documentation, and real-world outcomes.

These considerations reflect broader best practices for lending money within a family.

 

Technical Appendix

Key concepts
Secured vs. unsecured debt
Mortgage and deed of trust recording
Creditor priority
Bona fide debt analysis

Analytical framework
Intent and documentation
Public notice and enforceability
Consistency between structure and conduct

 

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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