The problem with one spouse buying out the interest of the other with the proceeds of a new loan is, it is not purely a refinance. The spouse being removed from title is, in fact, selling their ownership interest to the other person in exchange for proceeds or receiving debt relief as a result of the transfer or both.

Moreover, settlement agents handling the transfer of title must process the transfer and payment of consideration portion of the transaction as a sale, and not a refinance. The sale file handles the transfer of title and the loan is processed in a separate refinance file; both files close concurrently. The sale file is processed as a cash sale, where the seller must complete the Substitute 1099–S form or Certification for No Information Reporting along with all other forms and documents typically signed in a sale transaction.

If the principals prefer, they can have their attorney prepare the deed and deposit it into the refinance file. If this is done, a separate sale file does not need to be processed. The attorney needs to include a letter of instruction which states when the deed can be recorded, what is due and whether an owner's policy of title insurance will be purchased by the remaining owner. The attorney will be responsible for any and all 1099–S reporting and/or withholding the transfer may impose.

Settlement agents must be on alert for transfers of title where consideration is received. Anytime a transfer of title results in consideration in the form of proceeds or debt relief, it is reportable to the Internal Revenue Service (IRS). More information can be found on the IRS website at www.irs.gov.