Not So Fast! Advice for Non-Married Couples Purchasing a Home
For a couple, purchasing a home together can be an exciting, if stressful, event. One important aspect of this event that is often overlooked, particularly when the couple is not married, is each person’s rights and obligations regarding the property. Who will own the property, and how? How and when should the property be sold? To address these questions and others, individuals purchasing a home together should not only discuss these issues in advance, but should also consider executing an Equity Sharing or Co-Ownership Agreement which sets forth the rights and obligations of each individual. Some of these issues to be addressed in such an Agreement are set forth below.
Ownership Interest and Title
Individuals should decide upon their respective ownership interests in the property. Will each person own one-half of the property, or some other percentage? The individuals should also determine how to take title to the property. In Maryland, there are three ways to take title to property:
- Joint tenancy (with rights of survivorship);
- Tenancy in common or
- Tenancy by entirety (which is available only to married couples and not addressed here).
If the parties want title to the entire property to automatically vest in the survivor upon the death of the other party, then the property should be titled as joint tenants. If the prospective owners want each party to be free to designate an heir to inherit his or her interest when he or she dies, then the property should be titled as tenants in common. There may be other tax and estate planning issues which affect the couples choice of ownership structure.
Couples should discuss the sharing of household expenses. This includes, without limitation, mortgage payments, homeowner’s fees, real property taxes and homeowner’s insurance. They should determine how these expenses will be paid. Will each pay his or her share directly to the creditor or will one party be responsible for payments to third parties, but be entitled to reimbursement from the other? What percentage of such costs will each party pay?
Determine who will decide what repairs will need to be performed. Also, address each person’s respective obligations for payment of those repairs. Consider whether or not a mutual agreement in writing is necessary before a repair is undertaken.
Investment in the property
Couples should put in writing each party’s respective contribution and source of funds applied towards the purchase price, and address how the contribution will be treated upon the sale of the home. For example, if one party has paid more towards the purchase price, then should that party receive more of the net proceeds of sale? Should each party’s investment percentage be adjusted based on payments of principal, taxes, capital repairs, and the like? Consider whether or not each party shall receive a reasonable rate of return on his or her respective investment. If so, how will the reasonable rate of return be determined?
Selling the property
Decide what steps should be followed in the event either party wants to sell the property. For example, should the property be sold automatically if one party dies or if the relationship or partnership ends? Address whether one party has the right to purchase the other’s interest before the property is sold on the “open” market and at what price. This may involve obtaining an appraisal for the property at the time of sale. Also, each individual should determine whether either party may sell, transfer, assign, pledge or encumber his or her interest in the property without the other’s written consent.
Leasing the home
Partners should discuss whether either has the right to rent the home without the written consent of the other party, or whether any guest may reside in your home for any prolonged period of time (a frequent point of contention between couples)! If so, determine the length of the lease and, if rent is received, how the couple will allocate those funds.
Income tax deductions
Finally, couples should agree on how any income tax deductible expenses arising from ownership of the property will be allocated. What is written above is far from an exhaustive list. Although the purchase of a house can be exciting and rewarding, this article should give the reader some understanding of the complex issues that surround the purchase of real property with another who is not his or her spouse. As with any issue of this magnitude, it is recommended that each party involved have an attorney review any relevant agreements, to ensure that the couples’ home purchase is a satisfying, enjoyable experience.