Owning Half of the House: Cohabitation, Equity, and Estate Planning Considerations for Unmarried Homebuyers
Home-buying can be exciting, fun, and at times, exasperating. While Iowa law provides a framework for dividing assets in divorce and affords widowed spouses certain rights in the estate of a decedent, unmarried homebuyers need to take extra precautions to protect themselves and their respective financial investments in the home.
Before jumping into home ownership with your partner, ask yourself these three important questions:
Who is bringing the money?
While some may plan to split the purchase 50/50, it’s not uncommon for couples to come from differing financial positions. Inheritance funds or gifts from one party’s family members can further complicate how you structure your purchase transaction.
As you begin house shopping, it is important to have an honest discussion with your partner about your respective incomes, debts, and other financial obligations. Judgment liens against one partner will affect the interests of both. Talk about how you intend to allocate the purchase price, due diligence and closing costs, and develop a system for paying and managing joint or household expenses. Your attorney and CPA can advise you on options for structuring your financing and protecting your interest in the home.
How will the property be titled?
Depending on how the purchase is being financed and the credit-worthiness of each individual, a couple may want to title the property in one party’s name only. While this may simplify the situation from a legal perspective, the non-titleholder does not receive the benefits of legal ownership, and does not build equity in the home. If choosing this option, it is important to think about how you will allocate responsibility for the mortgage payments and incidental costs of home ownership like property taxes, insurance, or major/minor repairs. If planning renovations or major improvements which will increase the value of the property to the benefit of the titleholder, how will you address any contributions by the non-titleholder to these efforts? Discussing these issues in advance will help clarify each party’s expectations and obligations.
Alternatively, if you plan on taking title together, you will need to decide which form of legal ownership best suits your circumstances. Under Iowa law, the default form of property ownership between two individuals is known as “tenants in common” (TIC). As tenants in common, each party owns an undivided interest in the property (usually half). Upon death of one of the parties, that undivided interest becomes part of the decedent’s probate estate, and distributable to the heirs at law. For unmarried couples, it is important to consider how TIC ownership might affect your estate plans.
Because of possible probate issues, many couples choose to take title as “joint tenants with full rights of survivorship and not as tenants in common”. The primary feature of a joint tenancy is the right of survivorship—meaning that upon the death of one of the co-owners, the property automatically passes to the survivor. A deed must contain specific language to create a joint tenancy, so be sure to specifically communicate to your real estate agent or attorney that you intend to take title in this manner.
As you think about allocating the responsibilities and obligations of homeownership, you should consider how your property ownership fits into your estate planning goals, and discuss any issues, concerns or unique circumstances with your attorney.
What if things don’t go as planned?
While it is easy to get swept up in the potential of a new home, it’s also important to be mindful of worst-case scenarios.
People and circumstances change, and breakups happen. Disposing of a major joint asset like a home can intensify the pressure on an already uncomfortable situation. Keep in mind that under Iowa law, a cohabitating party (non-rent paying, non-titleholder) is generally not considered a “tenant”, and is not entitled to the protections afforded under the Uniform Residential Landlord Tenant Act. Before you buy, have a mature discussion about how you and your partner might handle move-out, a buy-out by one of the parties, partition, or a mutually agreed joint sale, and have an attorney incorporate your plan into a formal written agreement. Doing so will give you an orderly framework to fall back on during a potentially emotional transition.
Additionally, as discussed above, unmarried partners are not afforded the same rights or benefits as surviving spouses. Unless the decedent has a will providing otherwise, Iowa succession laws will likely place a tenant-in-common’s property interest in a parent, child, or sibling of the decedent. This means that the surviving domestic partner may end up co-owning their home with a relative of the decedent, or may be pushed to sell the home or purchase the half interest. In the case of joint tenancy, the surviving owner may suddenly find themselves solely responsible for mortgage payments and household expenses previously shared with the decedent, creating affordability issues that may add stress to grief.
Although homebuying can be an emotional process, as with any investment or major purchase, it is critical to complete your due diligence and engage professionals to assist you along the way.
For more information
For more information on this or other legal topics, contact Whitfield & Eddy Law attorneys in Des Moines, Iowa.
About the authors
Alecia Cederdahl is a member attorney at Whitfield & Eddy Law and chair of the firm’s real estate practice group. She works with clients on commercial, residential, and agricultural transaction and business entity needs. She can be contacted by email or by phone at 515-288-6041.
Jessica James Rotole is a member of the firm’s family law practice group and has been assisting clients for over a decade in divorce, child custody, modifications, and other issues. She can be contacted by email or by phone at 515-288-6041.