Dear Claire: What’s the Difference Between Buying a Home as a Married Couple vs. a Non-Married Couple?
Navigating Joint Homeownership: Marital vs. Non-Marital Relationships
A couple of things to think about is the big difference between these two types of relationships. If you’re married, you have a way out of the relationship and in owning the home, whereas if you’re not married you do not have an easy way out. What do I mean by that? If you get married and things don’t work out in the course of your marriage and you buy a house together, your divorce will help facilitate figuring out the split of assets. If you are two people, perhaps in a relationship, or even if you are two people that are unrelated (i.e., you are friends and buy a property together) there’s no set-in-stone way for you to separate your assets.
In a divorce, courts will say, “Hey, you both have to agree how you’re going to separate your assets.” In a friendship or relationship without marriage where you buy a property, there is no agreed upon terms. One of the reasons, though, that this can be useful is that if you’re buying the property before you get married. When buying a house before getting married, you can decide how you want to do it. I have plenty of people, especially younger couples, that are interested in splitting the asset in different ways. Say it’s not a 50/50 situation, and one of you shows up to the relationship and is going to put 75% down, however, has credit that is not that great. It’s a cool way to play to each other strengths if you need to and be a little bit more flexible.
What’s interesting is if you apply for a loan together, no matter whether you’re married or in a relationship, or frankly not even in a relationship and are just friends or family or something like that, lenders will take the two of you and smash you together and take the worst of everyone. A lot of people think that it’s an average of whomever is applying for a loan. However, it’s not actually an average – it’s actually the lowest common denominator. So perhaps my credit’s good, your credit’s not so good. They’re going to take your credit and my debt and smash them together and make them a less of a great credit candidate as the two of us would be separate. The reason why this matters is whether you’re married or whether you’re just in a relationship, it’s important for you to know this because in both of these instances you can have the loan structured however you want. Just because you’re married does not mean that you have to apply for credit together. There are ways around it. I could buy the home outright by myself and then just add you to the title. The title is the ownership of the property. It’s an instrument that shows the ownership of the property. So what does that mean? If we own something together, such as a car, in which they used to call the title the ‘pink slip,’ but it’s really just the deed to your car. You can have multiple people listed on the title as to whom owns the property.
In a relationship and in a marriage, you’re typically going to want to understand this as it is a big piece of how you want things to go if you should pass away. The deed plays a lot of a part in that. Meaning if you and I are in a relationship and say we are not married but we own a house together. I might want, if I pass away, my half of the house (let’s say it’s split 50/50) to go to my niece instead of going directly to you. In the state of Oregon, most of the time the court may assume if you’re married that you want your half of the house to go to your spouse. It doesn’t have to be the case if that’s not what you want. Therefore, these are the hard conversations you’re going to need to have when you’re buying a house together, whether you’re married or not.
The big thing you need to remember, and you’ll hear this whenever you decide to buy a property with someone, is that you’re going to be called ‘tenants-in-common.’ Most of the time when people buy property together, they’re buying it as tenants-in-common and anybody can buy anything as tenants-in-common and then from there you have to decide how you’re going to split it. For example, it could be I own 75%, you own 25%, and then after we figure that out we have to figure out is, “Do I give my heart to you when I die or vice versa?”
These are big questions and a lot of times when people are buying houses, they don’t think about this. I’m often facilitating these conversations, especially if you’re young and you’re not thinking of what happens to my half of the house if I die. However, that is all going to be specified in the deed, so you have to decide that up front. You can change the deed if you want to so, you know, if down the road, I don’t know … say you win the lottery and you give more money so that now it’s a 50-50 split. You can change the deed to reflect whatever changes in your relationship that you make so it’s not something that cannot be changed.
We talked about loan issues and we talked about the title issues, however, there’s one more thing that happens with your principal residence, which is regarding tax deductions. Typically, whomever is on the loan gets the full amount of the tax deduction. This will depend on your CPA and you’re also going to want to talk to an accountant. I have seen accountants agree to say, “I’m on the loan totally and my partner is not on the loan at all, but we’re splitting the cost 50/50.” I have seen CPAs say, “Hey, it’s okay if you want half of the tax deduction and give your half of the tax deduction because you’ve both been contributing to pay the mortgage every month.” I have seen that work, but you’re going to want to talk to your accountant, specifically to see what would work for you. So that’s the first thing. The second thing and this is true of whether you’re in a relationship, single, or married and you can file jointly, or single and in a relationship. In a relationship, I’m assuming you’re both filing single so typically you can split the interest and deductions. However, you’ll want to talk to your accountant about that. Secondly, if you’re both living in the property and have owned and lived in it for two out of last five years there’s this magical thing called the ‘principal residence exclusion.’ What that means is when you both go to sell the property, you are going to be exempt from capital gains. If you meet those two tests, lived in and owned it for two out of last five years, each of you individually gets $250,000 of gain tax free.
Let me give you an example, because this is very difficult to understand. Say my partner and I bought a house for $500,000. We owned it and lived in it for 10 years. In 10 years, it’s now worth $1,000,000. I’m doing this because it is easy math. So, we bought the property for $500,000 and we’re selling it for a million dollars. That is a $500,000 gain. Let’s say if we took a different example and say we put that money in the stock market and say we invested $500,000 and invested it well and it turned into million dollars. Now all of you know that would be $500,000 of money that you have to pay taxes on because you increased the value of it. With your primary residence, that is not true. So. in the instance that we were just describing we have $500,000 of gain. $250,000 of it is tax free to me, and $250,000 of it can be tax free to my partner and that is true whether you’re married or whether you are not. You could even not be married or even in a relationship. It doesn’t matter as long as you’ve lived there and owned it for two out of last five years. This is like the expert level class on understanding the subtleties of real estate.
If you have questions, I’m happy to explain this more in-depth to you as I really makes a difference in your planning for your future and making sure that it’s right. Remember to subscribe to our Paris Group Realty LLC YouTube channel and see all the other additional info that we have there. Talk to you soon. Take care.
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