Imagine this scenario: An unwed couple decides to purchase a home together. After a few years in the house, they split, not-so-amicably, leaving a long list of questions about what to do with the shared property:
- Could one buy the other out or would they have to sell?
- If they sold, how would the profits be divided?
- If one stayed in the home, would they have to refinance, or could they just pay rent to the other?
- What would happen to all the money one of them invested in the down payment?
- Would either of them have any rightful claim to any of the money they paid into the mortgage?
- Who gets to keep the furniture, artwork, and other property they’ve accumulated together in the home over the years?
- If one dies, who receives the proceeds on sale?
This was their state of affairs when I met them – in the midst of a contentious break-up and barely able to have a conversation about the weather much less the division of property. We were eventually able to work things out in a mutually acceptable way, but we could have saved a lot of time and anxiety, and possibly some steep legal fees, if only this couple had taken the time to work through the legal ramifications of owning property together before they purchased.
As a seasoned title attorney doing business in the District of Columbia, Maryland, and Virginia, I’ve seen similar scenarios play out time and time again:
Couple falls in love.
Couple does not marry (either by choice or due to legal barriers).
Couple decides it’s cheaper and/or more financially wise to invest in real estate together.
Couple buys a property together.
Couple splits up.
This is the point when they might finally consult a title attorney such as myself, or an experienced estate attorney – someone like my colleague Stuart Sorkin, who like me, has seen this situation play out in many, many different ways over the years.
If you want to avoid the mess these folks found themselves in, Stuart and I have compiled our best advice for unmarried couples to help them make the smartest and most informed choices when it comes purchasing property together.
Consider the End Before the Purchase
Any unmarried couple considering a home purchase should run, not walk, to consult with an experienced real estate lawyerwho can help them work through any possible pitfalls that might arise.
People in the thick of love and romance rarely want to talk about what would happen if one of them dies or there’s a tumultuous break up. But not talking about those things before buying property together could lead to huge problems down the road.
This process is a little like creating a prenuptial agreement, but it’s a critical step to avoiding all kinds of possible financial and emotional situations down the road. Understanding what each party brings to the table and considering all the potential outcomes may seem anti-romance, but when you’re making a purchase as big as a home, the details matter. Making these types of decisions when you are in love can be difficult, but it is far less costly and emotionally draining compared to waiting until there is a problem.
Know Who Pays What and Get it in Writing
It’s rare that a couple comes to the table with the same financial pros and cons. Generally, one person has more savings, one has more income, one has a better credit score – you get the idea. While couples often work out ways between themselves to deal with these uneven contributions, if the relationship doesn’t last, these differences can cause major issues.
For example, if one partner contributes more money to the down payment, how can that partner be assured that they will get their investment back upon a voluntary or involuntary sale? Or does the partner get some form of compensation, for example, interest for the larger down payment? Or if one partner has more income and pays more of the mortgage each month will they get a greater share of profits if the house is sold down the line? And which partner will get to take the mortgage interest deduction each year? Or in the case of a sudden death, does the survivor have a continuing occupancy right? If yes, for how long and are there conditions? In the case of death, how does the deceased’s family receive their share?
We highly recommend working with an real estate lawyer or other legal consultant to create a legally binding contract that outlines the details of who contributes what amount to:
- Down payment
- Monthly mortgage payment
- Property taxes
- Household expenses like utilities, repairs, maintenance, and planned renovations or updates
- Shared home furnishings and appliances (such as furniture, artwork, etc.)
Be sure it also answers the following questions in as much detail as possible:
- If there is a split what are the timetables for selling the property?
- Does a surviving partner get a limited occupancy right or a right of first refusal to purchase the real estate?
- What say, if any, does the deceased partner’s family have in the real estate?
- How can both partners ensure that their family will eventually receive sales proceeds?
While it may not seem necessary to spell out who contributes every last penny, knowing all of this before putting in an offer on a home will minimize issues down the road. Finances are often a point of contention with couples and this also helps to open that discussion overall and make sure both partners are on the same page and know what is expected of them from the beginning of the process.
Choosing the Best Title Option for Your Situation
When it comes to the property title, or the deed, there are several options for unwed couples. Each one has significant consequences in the event that the couple splits up or one of them dies, so careful consideration should be given before a decision is made.
Titling a home as Joint Tenants means that each partner has equal ownership of the home and if one of the partners dies that partner’s share of the home transfers to the living partner. If a couple is contributing equally to the property financially and neither has any heirs, this may be a good title choice for them. But if there are heirs, or if one or both owners wants their share of the property to be transferred to someone other than the co-owner, titling in this manner could potentially cause tension, conflict, and huge headaches.
You could also choose to own your home as Tenants in Common. In this case, the title specifies what percentage of the property each partner owns. While that seems straightforward, this could cause issues if one of the partners dies because if there is no will, that partner’s share of the property belongs to their next-of-kin. If the desire of the partners is for their share of the property to pass to heirs though, and both agree, then this title option could work for them. Some of these negative consequences can be addressed in what I call a Co-Sale Agreement.
In some cases, it might make the most sense to have one partner be the Sole Owner of the property. This could be a good choice if one partner has a much lower credit score or if only one partner will be contributing financially to the down payment and mortgage of the home. However, keep in mind that only the titled owner can claim the mortgage interest deduction on their taxes and if a partner is not on the title their legal rights regarding the real estate are more difficult to enforce.
A more sophisticated option for unmarried couples who want to own property together would be to put it in a Revocable Trust. While treated as a pass-through entity for tax purposes, the trust allows the parties to stipulate who pays for what and how the property is treated should the couple part ways or should one of the parties dies. A revocable trust has one significant advantage over other types of written agreements in that the recorded owner of the property is the revocable trust and its terms are required to be disclosed to the title attorney upon a sale of the real estate.
Who Gets What?
Some of the decisions made about your estate and how the property will be titled will determine, or at least lay the groundwork, for who owns what percentage of the property and who inherits the other’s share if one of the partners passes away. But if there’s a bad breakup or an unexpected death, the home isn’t the only property that has to considered.
We fill our homes with things from our pasts, as well as things we’ve picked out individually and as a couple. There’s something to be said for thinking about what will happen to those items down the line if the relationship ends. Who gets the antique clock your grandmother left you? Who inherits the appliances your partner purchased with his tax return if you die? How do you divide the property that you bought when you were together?
I’ve had clients who only wanted to provide for the big picture issues and others who have had very specific instructions for every conceivable issue. We don’t always know what we’ll be buying and who will contribute what items to your home design. Still, I always recommend that my clients include details about any items that might be placed in the house, whether purchased separately or together, and how they should be split or who will inherit them should something happen to the relationship or one of the partners.
It may sound like a lot to consider before you start scanning the listings for your dream home but doing the work now could save you so much in legal fees and many headaches (and potential heartache) down the line. Plus, talking about these things before making one of the most significant purchases a couple may ever make can ensure that both partners are on the same page financially – something any couple would benefit from whether buying a home together or not.
If you and your partner are considering purchasing property together, reach out to Stuart or me to get the process started. We can help you ask the right questions, figure out the answers and even recommend real estate agents familiar with working with unmarried couples. Don’t wait until you’re signing a purchase agreement to start thinking about these important issues!