As more couples switch to cohabiting before marriage, or choose not to marry at all, the decision about how to divide property becomes a thorny one — and even one that can end a relationship. How do you know whether you can trust your partner with sharing a big financial asset like a home? Below, we discuss a common scenario and how you can potentially share both your bills and your assets in an equitable way.
In this scenario, a 32-year-old man has just fulfilled his dream of buying his own home. He has a long-term girlfriend, but they have not lived together before. The man expects that his girlfriend will move in with him and contribute to paying the mortgage, but she refuses to do this unless her name is also put on the deed. Since she didn’t contribute to the down payment, he feels the property is his, not theirs. How can this couple resolve the issue?
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Property rights in the US
A deed solidifies the transfer of ownership of a property from one party to another. When a home is sold, the original owner transfers ownership of the home from themselves to the party or parties who are buying the home. In some states, when you take out a mortgage on a new home, your lender will hold the deed as a trustee until your loan is paid in full. Anyone with their name on a deed has a legal right to claim the property.
Many married couples now hold their family home jointly. However, if a home was purchased by one spouse before the marriage, it’s often not considered joint property. A spouse who does not have their name on the deed may still attempt to assert a legal right to claim ownership of a home if they can prove they have contributed to payment of the mortgage or similar financial contributions. If you do not want an asset or property to become marital property, you can opt for a prenuptial agreement to protect these assets.
While the rules of property ownership in a marriage are more clear cut, entering into a common law partnership can pose legal problems for dividing property in the event of a split.
Common law marriages by state
Rules for common law marriage vary widely by state. Some states, such as Colorado, Texas and D.C., recognize common law marriage with the same rights as legally married partners, while others, such as California, do not recognize common law marriages at all. Depending on where you live, it’s important to get familiar with the laws that govern partnerships so that you understand your rights and responsibilities in the event that you break up. You should also know that if you move during your partnership, the state where you first established cohabitation is the state’s laws that will be applicable to your union.
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Tax considerations when adding your partner’s name to a deed
When you add a partner’s name to your home’s deed, you are transferring a portion of your home’s value to them and securing their future interest in it. With this transfer, you may be eligible for property tax exemptions or deductions in your state, especially if the property qualifies as your primary residence.
However, both of you may also be responsible for capital gains taxes in the event you sell the property. You may also trigger the gift tax, which is a federal levy on transfers of money or property to another person.
If enough time passes between your buying the property and ‘gifting’ a portion of it to your partner through adding their name to the deed, your property taxes might be affected as well. Local tax authorities will often reassess the value of your home when changes to the deed occur, so you should be prepared for higher property taxes.
Potential solutions for this couple
In the case of our example couple who can’t agree on how to divide the responsibility for and ownership of their future home, there are a few options for how they can proceed. First, speaking with a financial counsellor can help them gain clarity on how to equitably divide their assets and also manage their debts and expenses. If the partner who owns the home significantly out-earns the other partner, they may need to come to a financial arrangement other than a 50-50 split.
It’s also important to get clear about your future plans, including discussing marriage. While the institution may be waning in popularity, it’s still the best way for couples to secure their financial future and ensure joint access to any wealth and assets accumulated during the relationship.
If you’re having a difficult time agreeing on your financial future as a couple, it may be time to consider relationship counselling, to get at the deeper issues that may be blocking you from seeing eye-to-eye on your finances.
Outside influences from friends and family may be making one or both of you biased, so setting your problems before an objective third party can help you begin to see things clearly.
Even if this couple decides not to marry, they can explore creating a cohabitation agreement. This is a legal document that outlines the rights and responsibilities of both parties with respect to finances and assets. It helps you decide on potential outcomes for your joint property in the event of a breakup or other significant life event.
A cohabitation agreement can help close the gaps that the absence of a legal marriage or common law union leaves open. The enforceability of these agreements also varies by state however, so be sure to consult a lawyer to understand more about your rights and responsibilities before you draft an agreement.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
