Unmarried Homeowners Part II

Eric and Leslie have had their offer accepted on a house in Colorado and are moving through the inspections, appraisal, and all of the other processes preliminary to closing on what they hope will be their new home. The questions about their joint ownership and liability, however, remain.

As explained earlier, the two are not married nor do they intend to be, at least in the near future. In their case it is a matter of choice but with other couples there may be financial, legal or social constraints prohibiting a legal union. As we said in part one of this short series, these unmarried couples need to be aware of the many potholes on the path to significant otherhood.

This is not an isolated issue. It is estimated that unmarried buyers accounted for over 9 percent of residential property transfers in the first half of 2004. This number included relatives, investment partners, and friends but the majority were undoubtedly significant others.

Laws governing property ownership are almost universally enacted and enforced on the state level. Some states are in the process of expanding the rights of the unmarried in this respect while others are narrowing them, particularly when it comes to same-sex couples.

In many states there is nothing to prevent either a real estate agent or a lender from discriminating against unmarried partners. The subject may not even arise with heterosexual couples who often pass, at least with real estate agents, as married, but same-sex partners often encounter prejudice at every state. There are also still states where co-habitation by unmarried couples is a felony. These laws are rarely enforced but be aware.

Eric and I had talked about the problems inherent in his being on the note alone while he and Leslie were both on the deed. For example, in the event of a tragedy he might end up owning the home with Leslie's parents while he had sole responsibility for the mortgage or she might lose the home by triggering the due on sale clause if she attempted to put the title in her own name.

Eric is buying with a VA loan and, while the government always moves in mysterious ways, it is unlikely that they, or most banks, would allow a couple to share ownership of a home while only one was responsible for repaying the money that purchased it. The bank will be virtually unable to foreclose on the whole house if they only hold a mortgage note signed by the owner of half of it. On the other hand I have no idea how the current government might approach a situation where a borrower and a co-borrower were not joined in wedlock.

Even if the application for a mortgage goes forward under both names the fact of their non-marriage will cause difficulties.

Many banks will require that unmarried applicants qualify separately rather than as a unit; thus, although their combined incomes are adequate to support the mortgage, Eric may not be able to prove he can pay his portion on his own. If married, Eric's AAA credit rating would carry the day but as they are unmarried his may not be considered to compensate for Leslie's marginal history.

According to The Wall Street Journal, in the event of the death of one spouse, the surviving partner may have to pay estate taxes on the portion of the property he or she owned if the IRS determines that the deceased partner was the sole owner and then the surviving partner's estate would be taxed again upon his/her death. Apparently sole ownership is a rather arbitrary decision that the IRS can make if the couple doesn't keep adequate records of their individual contributions to the property.

A property owner who enters into a relationship and then decides to put his unmarried partner on the deed will run afoul of gift tax regulations and may have to file a gift tax return. There is also the risk of giving up part of the $1 million lifetime gift-tax exemption that he may need later.

Older unmarried couples confront more problems if one or both desire to leave assets to a child from an earlier marriage or have financial obligations arising out of that marriage.

Types of property ownership automatically provide some protection to the married. Owning a home as Joint Tenants with Rights of Survivorship or under joint ownership are the defaults for married couples although it may not be the best option among others available. These two types do not allow one partner to unilaterally sell his share or leave it to anyone other than the co-owner but does facilitate title transfer upon a death and avoids inheritance taxes. Unmarried couples may want to ask their attorney about taking title as tenants in common as this will allow them to bequeath their individual share of the home to whomever they wish.

Pre-nups are pretty unromantic but similar agreements between the unmarried who are buying property together are essential. Call them, as the Real Estate Journal does "domestic partner agreements." These should spell out exactly how the property is to be divided and/or disposed of if the relationship does not last. Partners should also keep detailed records of the contributions, financial and in-kind, to equity in the property by each partner. Another possible protection for each party to the purchase is a will. This is particularly important if one partner wishes to protect a parent or a child in the event of his death.

If you or someone you care about is contemplating a property purchase with a significant other there is an essential step. Consult an attorney and follow his advice. A real estate attorney may be appropriate or it might be one specializing in estates or in family law. Most attorneys will provide a free short consultation over the phone so call one in each of these disciplines and see what they recommend. It may cost several hundred dollars to get the appropriate documents drawn, but if love does not in the long run conquer all it will be money well spent.