Over the past few years more people are buying houses with someone they are not married to than ever before. In some cases they may plan to get married in the future but in many cases there are no plans for marriage. Additionally, a large number of people are buying houses with others as an investment property to be rented out. The reasons they decide to buy aren’t much different than anyone else; low interest rate environment, attractive prices and in many cases the cost of rent has increased substantially.
One of the biggest decisions that someone buying a home with another person they are not married to faces is in what form the property will be owned. There are significant legal and tax consequences associated with this decision and then the inevitable question of what happens to the house if one of owners passes away, is incapacitated, or at some point in the future one wants to sell and the other person does not.
There are two primary ways to own a property, as Joint Tenants or as Tenants in Common. Certain states may have slight variations on the exact rights and requirements of each type of ownership and may use different terminology but conceptually the rights and responsibilities are similar no matter where you are.
Joint Tenants with right of Survivorship
In this form of ownership the parties each own an undivided interest in the property. They are co-owners and legally each are considered equal owners of the property. In the case of death, the interest of the deceased does not enter into their estate or become subject to probate, their interest is automatically assigned to the other owner(s) who then become(s) the sole owner(s). This is how most married people hold title to property and will work fine for unmarried individuals if it reflects the intent of the parties. However, if one of the parties wishes their interest in the property to go to a relative or someone else at death then this type of ownership will not allow for that to occur.
Additionally, this form of ownership can cause some confusion from a tax perspective if the borrowers do not file a joint tax return. The question becomes who is entitled to the various tax deductions associated with the ownership of the house (taxes and insurance) since both parties own the property.
This form of ownership may not address the various issues that arise if the property is an investment property and the parties do not share the income and expenses equally. In cases where one person provides the down payment or pays more of the expenses, the parties may agree that they should receive a higher percentage of the income or sale proceeds. In the absence of a separate agreement, this type of ownership will treat each party as an equal co-owner even if one pays substantially more of the costs.
The last major point to be made with this type of ownership is that in order to sell the property both owners must agree and sign the required documents.
Tenants In Common
With this type of ownership each party owns a percentage of the property and such percentage is set forth in the Deed. The percentage owned can be sold or gifted to anyone, without the approval of the other party, and in the case of death the interest in the property become subject to the terms of an individuals’ estate.
As a result if the parties agree that one person will pay more of the expenses or provide more of the down payment and therefore their ownership should reflect this, the Tenant in Common structure allows for this. The ownership interest can also be adjusted by the owners at any time by amending the Deed.
Lastly, if one of the owners wants to sell their interest they may do so without the consent or approval of the other party unless there is a separate agreement prohibiting such transfer.
If both borrowers are not obligated on the mortgage there are other questions that need to be considered and possibly addressed. Often only one of the parties will be obligated on the loan due to the other party having poor credit or difficulty in qualifying with both, or for mere convenience but both will be listed as owners. If this happens then the parties need to contemplate how the ownership of the property will be split. Among the questions to be answered are:
1. Will the party that is not on the loan still be on the title and be a equal co-owner in the case of Joint Tenants with Right of Survivorship?
2. If so, what happens if the parties decide not to live together any longer or either party decides not to fulfil their obligation to either make payments or financially contribute?
The parties need to keep in mind that if only one of them is on the loan then only that person can be held financially responsible by the bank and be subject to foreclosure proceedings. This can be mitigated somewhat by a separate agreement between the parties but does not change the financial obligation on the mortgage.
These are just some of the questions borrowers should consider when purchasing a home with another person especially if they are not married. Proper planning will go a long way to avoiding confusion and undesired circumstance down the road. Lastly, it is always advisable for the parties to consult with professionals regarding the tax and legal implications the will apply to their situation. Your realtor or loan officer can often introduce you to professionals who can provide the information and answers needed.