Senate Bill 125 pertains to certain types of cancellation of mortgages and deeds of trust; the bill was ratified and became effective June 21, 1996; it amended G.S. 45-37(a) and G.S. 47-46.3. "House Bill 459, pertaining to cancellation of deeds of trust, passes," an article in our August, 1995 newsletter by Ed Urban addressed new cancellation statutes at that time.

G.S. 45-37(a)(1) - "acknowledgment of satisfaction"

G.S. 45-37(a)(1) pertains to acknowledgment of satisfaction to the register of deeds by a trustee, mortgagee, legal representative of the trustee, mortgagee or a duly authorized agent or attorney of any of them. The amendment states that the register of deeds is not required to verify or inquire into the authority of the person acknowledging the satisfaction.

G.S. 45-37(a)(2) - "cancellation by exhibition"

G.S. 45-37(a)(2) pertains to cancellation by exhibition of any deed of trust, mortgage, or other instrument. The amendment deleted the requirement that the endorsement of payment and satisfaction be dated before December 31, 1995, and the requirement that in order to use G.S. 45-37(a)(2), the endorsement and satisfaction must be dated. The amendment also deleted the provision that the register of deeds may require an acknowledgment of cancellation.

The amendment added the provision that the register of deeds is not required to verify or inquire about the authority of the person making the endorsement.

G.S. 45-37(a)(5) - "notice of satisfaction" and G.S. 45-37(a)(6) - "certificate of satisfaction by owner of note"

G.S. 45-37(a)(5) pertains to cancellation by means of exhibition to the register of deeds of a form notice of satisfaction. G.S. 45-37(a)(6) permits cancellation of a deed of trust, mortgage or other instrument to be effected by a certificate of satisfaction. Both G.S. 45-37(a)(5) and G.S. 45-37(a)(6) were amended to add the requirement that the document be accompanied by the deed of trust, mortgage or other instrument or a copy of it for verification and indexing purposes, but the instrument will not be recorded with the notice.

G.S. 45-46.3 - form "Affidavit of lost note"

G.S. 47-46.3 was amended to include the date on which the deed of trust, mortgage, or other instrument was satisfied. This amendment makes the affidavit conform more closely to the statute. (A few grammatical changes were made which do not significantly affect the substance of the affidavit.)

Senate Bill 470 amended the General Statues to add Chapter 45A which is entitled the "Good Funds Settlement Act." The Act pertains to disbursement of funds before deposited funds are collected and before required documents are recorded at the register of deeds. The Act becomes effective October 1, 1996 and applies to settlements on or after that date.

G. S. 45A-2. The Act only applies to transactions that involve a one- to four-family residential dwelling or a lot restricted to residential use.

G.S. 45A-4. The settlement agent (which is defined in G.S. 45A-3(15) as "the person or persons responsible for conducting the settlement and disbursement of the settlement proceeds, and includes any individual, corporation, partnership, or other entity conducting the settlement and disbursement of the closing funds") is not to disburse closing funds before recording deeds or loan documents that are required to be filed by the lender, if applicable, and verifying that the closing funds used to fund the disbursement are deposited in the settlement agent's trust or escrow account in one or more forms prescribed by the Act.

The agent is not to disburse settlement funds unless those funds are collected funds, unless the Act provides otherwise. G.S. 45A-3(7) defines "collected funds" as those which are "irrevocably credited." However, the Act allows the settlement agent to disburse funds that are not collected funds in its trust or escrow account if the deposit was made by one or more of seven forms which are:

1. a certified check;

2. a check issued by the State of North Carolina, the United States, or a political subdivision of the State of North Carolina or the United States;

3. a cashier's check, teller's check, or official bank check drawn on or issued by a financial institution insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government;

4. a check drawn on the trust account of an attorney licensed to practice in the State of North Carolina;

5. a check or checks drawn on the trust or escrow account of a real estate broker licensed under Chapter 93A of the General Statutes;

6. a personal or commercial check or checks in an aggregate amount not exceeding five thousand dollars ($5,000) per closing if the settlement agent making the deposit has reasonable and prudent grounds to believe that the deposit will be irrevocably credited to the settlement agent's trust or escrow account;

7. a check drawn on the account of or issued by a lender which is approved by the United States Department of Housing and Urban Development as either a supervised or nonsupervised mortgagee as defined in 24 C.F.R. section 202.2.

The remainder of the Act addresses the duty of the lender, purchaser, or seller in G.S. 45A-5 and validity of loan documents in 45A-6, penalty for violations. G. S. 45A-6 states that failure to comply with the act does not govern validity or enforceability of settlement documents.

Identification and Exchange Periods

Section 1031 of the Internal Revenue Code provides that no gain or loss will be recognized for exchanges of like-kind property which is held for productive use in a trade or business or for investment. The final regulations for IRC Sec. 1031 require replacement property to be substantially the same as property identified in the exchange; however, the regulations provide little guidance as to what property is substantially the same.

Any replacement property received within the exchange period can qualify for nonrecognition treatment, but replacement property received outside the exchange period does not qualify for nonrecognition treatment. There are strict time requirements which must be met in order to qualify for nonrecognition treatment, and failure to comply with the requirements will result in the transaction being taxable.

There are two requirements that must be complied with in order for the replacement property to qualify as like-kind. The requirements are:

1. Identification Period: The replacement property must be identified within 45 days of the date the relinquished property is transferred.

2. Exchange Period: The replacement property must be received on the earlier of

a. 180 days of the date the relinquished property is transferred; or

b. the due date of the taxpayer's tax return for the taxable year in which the transfer of the relinquished property occurs; this includes extensions.

The date on which the property is transferred is the date on which the benefits and burdens of ownership of the relinquished property are transferred; this is not necessarily the date on which a deed is dated or the date on which a deed is recorded. For example, in North Carolina, a deed passes title as between the parties without recordation. When multiple properties are transferred as part of the same transaction, the identification and exchange periods start to run on the date of the first related transfer.

There are no provisions for extending either the identification or the exchange period, even if the period ends on a weekend or a holiday, and the commissioner has no power to extend them.

Alternative and Multiple Properties

Three rules deal with designating alternative properties or overdesignating the replacement property. At least one of these rules must be satisfied, or the entire exchange will be taxable, except to the extent the taxpayer acquires replacement property before the end of the identification period. The three rules are:

1. Three Property Rule: three replacement properties may be designated without regard to their values.

2. 200% Rule: any number of replacement properties may be designated as long as their aggregate fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of all of the relinquished properties as of the date the relinquished properties are transferred.

3. 95% Rule: as many replacement properties as desired may be designated, provided the taxpayer receives identified replacement property constituting at least 95% of the aggregate fair market value of all of the identified replacement properties before the end of the exchange period.

With the 200% and the 95% rules, the fair market value of each identified replacement property is determined as of the earlier of:

1. the date the property is received by the taxpayer, if actually received during the exchange period; or

2. the last day of the exchange period, if not received during the exchange period.

With the Three Property and the 200% rules, all property identified as replacement property is taken into account, except property which has been properly revoked.