When an unmarried couple chooses to purchase a new home, there are several problems that can complicate the situation. The largest of these is the fact that the law treats unmarried couples as individuals. Thus, you will have to think about a few problems that most homeowners never have to consider. In the end, it all comes down to ownership: Who owns what, and what rights they have in regards to the property.
How Do Unmarried Couples Normally Deal With This Problem?
The law gives you a lot of flexibility when it comes to this situation. In most instances, unmarried couples will consult an attorney and draw up a contract that defines the rules and limits of the deal. This agreement is usually called a “cohabitation agreement“, or something similar.
To give you a better idea about how these agreements work, let’s take a quick look at this sample agreement. Of course, the agreement drawn up for you will probably differ from this one, but this will give you a good idea of which bases need to be covered in order to create a satisfactory agreement.
A good cohabitation agreement should include:
- Provisions for the death of either partner
- Provisions for division in the event of separation
- Provisions for the division of household expenses
- Care and custody of any pets you might have
- Provisions for division of proceeds if the home is sold
Your Three Primary Options
When it comes to the terms of your contract, you have three options as to the division of ownership. Each of these options offer certain advantages and disadvantages, so let’s look at each one in greater detail.
Sole ownership is an arrangement in which one member of the couple retains full property rights. In this case, the person whose name appears on the deed can sell the property, alter it in any way they want, or will it to whomever they choose. Obviously, this kind of arrangement requires a high level of trust between partners.
There are a few reasons to consider this option. First of all, your property taxes will be lower. When you enter into another type of contract, you are taxed as two people. By sticking with one name on the deed, you will ensure that you are taxed as one person.
This option might also be attractive if one partner has a very low credit score. By keeping a single owner, you will ensure that the other partners’ bad credit does not affect your chance of getting a home loan. Some people will try to register a single owner until the home loan is approved, only to add another co-owner later on. Although this might seem like a slick idea, it can get you in a lot of trouble.
The main drawback of this arrangement is that the interests of one partner are not fully guaranteed. If you happen to be the person whose name isn’t on the deed, you can find yourself in a very bad situation if the relationship turns sour.
That being said, it is possible to draw up a cohabitation contract in which the sole owner agrees to certain obligations. For instance, most contracts of this type will contain a provision that says the owner can not boot the other person from their home without adequate notice and/or a valid reason. Another small problem is the fact that, in a sole-ownership arrangement, only one member of the couple can claim the property as a deduction on their taxes.
Joint tenancy is basically an equal-ownership agreement. In this kind of contract, both parties are on the deed and have all the same rights. These agreements usually come “with right of survivorship” (sometimes abbreviated as WROS). That is just a fancy way of saying that if one party dies, the surviving party gets full ownership.
One good thing about this arrangement is the fact that it will prevent either partner from stepping on the rights of the other. For many couples, this would not be a concern, as they would not be together if they could not get along. However, it is good to know that your interests are guaranteed.
Another good thing is that both of you will be able to claim property deductions on your taxes, though your combined overall tax debt will be greater. There is also the right of survivorship to be considered. A sole ownership agreement does not usually grant a right of survivorship, so a joint tenancy is better in this regard.
Although it seems perfect on the surface, a joint tenancy agreement does have some problems. First of all, let’s talk about tax issues. Although both parties will be able to claim property deductions on their taxes, those deductions will be cut in half. Thus, you will only be able to deduct half as much.
This type of contract can also be very problematic in the event of a breakup. Let’s say you are in a relationship with someone, and you both own half of the house. If you break up, one person has to leave. Who will it be? That question can create legal battles that literally take years or even decades to conclude. Since each of you owns a 50% share of the house, you basically have two options: Either one partner can buy the other half of the home, or you can sell the home and split the proceeds. In most cases, the latter is what happens.
Tenants In Common
A “tenants in common” arrangement is probably the most common one. It’s a lot like a joint tenancy, but there are two key differences. For one, there is no presumed right of survivorship. If one of the property owners happens to die, their share will go to whoever is named in their will. The second difference is that ownership is not 50-50. Ownership percentages are agreed on by the couple and should reflect the stake that each has in the home.
Many couples go with this option because it allows them to divide the property according to the amount of money invested. For instance, if one partner provided only 40% of the money to purchase the home, it is fair that they would have an ownership stake of 40%. These ownership percentages do not affect the right of either partner to live in and use the entire house. Another benefit of this type of contract is the simplicity factor.
If you do not trust your partner completely, this might be a bad idea. They could theoretically will their share of the property to whomever they want, leaving you with only a small piece. Also, these kinds of arrangements can end badly if one partner has a much lower share percentage than the other. Another problem with this arrangement is the fact that either partner can face property forfeiture if their debts are extremely high, causing the other partner to suffer for mistakes that were not their own. Certain types of criminal activity can also cause the home to be seized.
Is The Decision Final?
Thankfully, this kind of decision is not final. As long as both parties are in agreement, it is possible to change the cohabitation agreement at any time or to simply throw the agreement out and make a new one. Of course, there will normally be some legal fees associated with this process.
As you can see, this is not a simple issue. We have tried to tell you everything you need to know, but only you can know which option is best for your family. We advise you to have many good conversations with your significant other before making a decision so that everyone is happy with the results. If you are happy with this article, and if it has helped you to be a little better prepared, we hope that you will fill out the contact form below.