Buying real estate is often considered a milestone — it’s an investment in your future, after all.
If you’re living with someone but not married, you might want to ditch the rental agreement and buy a home together.
But before you do, it’s important to understand the realities of being an unmarried couple buying a house. Some things a married couple takes for granted when buying a home might not apply when buying real estate before saying “I do.” Here’s what you should consider before taking the plunge with your S.O.
What type of tenants will you be?
“Buying a house with someone you are not married to is fine, if certain precautions are taken based on the co-buyers’ relationship to one another,” said Adam Stone, a real estate attorney in New York.
The first thing to figure out is what type of tenants you will be. Stone said unmarried couples can choose to be joint tenants with rights of survivorship or tenants in common. In a marriage, you have a third option: tenants by entireties, which allows for the smooth passage of the property to a spouse if one of you dies.
Joint tenants with rights of survivorship
If you decide to go this route, things work out pretty much as they would if you were married.
“There is no guarantee that a married couple buying a house stays married,” Stone pointed out. “But the legal divorce process would address the house ownership issue upon divorce.”
When you aren’t married, you might need additional agreements in place to figure out how to handle a split.
Brian Pendergraft, a real estate attorney in Maryland and the District of Columbia, pointed out that joint tenants must have equal shares and one cannot sell their share without the approval of another. Plus, if one partner dies, the other receives a transfer of the whole property.
Going this route can at least protect you from your partner selling their share of the property to someone you don’t want to deal with. It can save legal headaches related to the property if your partner dies.
Tenants in common
With this arrangement, you specify a portion of co-ownership to each person. “These percentages can be recited right on the deed when it gets recorded and would establish good proof of relative ownership,” Stone explained.
Tenants in common looks a lot like a business arrangement — and in a way, it is. Stone said either partner can sell their shares to anyone they please. Instead of the property passing to the partner upon one owner’s death, it’s possible to designate heirs for the shares.
This offers a degree of separation between the tenants. However, it can also leave you open to inconvenience if your partner decides to leave and sell their share to someone you don’t like.
Stone says that if you decide to use this method, it’s a good idea to use a tenants in common agreement or a co-ownership agreement that sets out the conditions for selling a share. This provides a way for you to protect yourself.
What about taxes?
Many married couples file their taxes jointly, which takes care of home-related tax benefits. Married couples also tend to pay their property taxes together.
Unmarried couples buying real estate have to decide how to divvy things up. They won’t be able to file joint tax returns and they have to be clear about who’s paying what.
“In a tenancy in common, each party has to pay their share of the taxes,” said Pendergraft. “Let’s say you own 20 percent of the property and your partner owns 80 percent as tenants in common. Your share of the taxes is 20 percent. However, all owners listed on the deed are responsible for 100 percent of the tax.”
You have to make sure you both pay what you should, or designate one person to collect the taxes and pay them on time. If your partner welches on their portion of the taxes, it’s on you to make it up.
Pendergraft said an unmarried couple buying a house together also needs to figure out how to divide tax benefits. If you plan to take the mortgage interest tax deduction, you might divide the benefit according to ownership or split it 50-50. Alternatively, one of you could claim the entire deduction while the other gets a benefit elsewhere.
Either way, you should consult with an attorney and a tax professional before moving forward.
You’re both on the hook for the mortgage debt
Chances are, you and your partner need to get a mortgage to pay for the home. Pendergraft says you are both probably equal for the debt. “If your partner stops paying, now you’re in trouble,” he said. “Either one of you can be held responsible for the entire debt.”
Before you enter into an agreement to buy real estate with your partner, you need to have trust. Do you trust your partner to keep making payments like you do? Can you make an arrangement where one of you is responsible for making the mortgage payment and then collecting the proper share from the other?
All of these questions need to be addressed before you buy a home with your S.O.
Watch out for creditors
“Married joint tenants … have an additional protection that unmarried people do not have,” said Pendergraft. “As a general rule, a creditor must have a judgment against both spouses to attach it to a house.”
This protects you since there’s a smaller chance your partner’s bad credit and debts will put your home in jeopardy.
This isn’t the case if you’re unmarried. “An unmarried joint tenant can have a credit of his partners try to attach the judgment [or debt] to his property even if he had nothing to do with the underlying issue,” warned Pendergraft. “So make sure your partner has good credit.”
Get it in writing
Buying real estate with anyone is a big deal. No matter your situation, it’s a good idea to hammer out the details and get everything in writing. A real estate attorney can help you understand your state’s laws, run the numbers, and mediate an agreement.
For the most part, Pendergraft says, a lot of the risks to unmarried couples are the same as those of married couples (other than the credit judgment issue).
“Married people just go to divorce court to fight over property,” said Pendergraft. If you want to buy a home with your partner and you’re not married, Pendergraft recommended an exit agreement and other paperwork to clearly establish rights and responsibilities.
There’s nothing wrong with an unmarried couple buying a house. But you need to know the risks and protect yourself as much as possible before you take the plunge.