Be careful if you buy a house with someone before you remarry

A growing number of divorced people are buying a house with a new partner to whom they’re not yet married.

In some cases, the couple plan to marry, but as a result of the divorce and other complications, they’re not able to arrange wedding bells as quickly as they would like. In other cases, people get into a new, serious relationship, but they’ve just come from a bad experience and are cautious about re-tying the knot.

Sometimes, a person simply moves into a new partner’s house and becomes a co-owner.

In all these situations, there are a lot of legal complexities, and it’s wise to talk to a lawyer first.

(By the way, this is good advice for anyone buying a house as an unmarried couple, whether or not they’re divorced. Did you know that one in four married couples under age 35 bought a home together before they said “I do”?)

Here’s a look at some of the issues you should consider:

Should we buy the house as joint owners?

If you’re joint owners, you both have an interest in the whole house. If one of you dies, the other becomes the sole owner. By contrast, if you’re tenants in common, you each have a percentage interest in the house. You might each have a 50% interest, but you could split it differently – for instance, 60% – 40%. You can sell your percentage interest to someone else, and if you die, you can leave your percentage interest to someone besides the other owner.

A big advantage of joint ownership is that if you pass away, the house goes to your partner without having to go through probate. But this can also be a disadvantage. For instance, if you have children from a previous marriage, you can’t legally leave them an interest in the house – the whole thing will go to your new partner, and your children will get nothing.

What if my partner and I have very different credit scores?

That’s a common situation, and if you jointly apply for a mortgage, it can make it harder to get a loan with favorable terms.

Of course, it’s possible to buy a house together, but only put the name of the partner with the better credit history on the mortgage. This can result in a better loan – but it can be a big problem if the couple split up. The partner whose name is not on the mortgage might walk off with an interest in the house but no obligation to pay the debt.

If I already own a house, and my boyfriend or girlfriend moves in, can I just make him or her a co-owner?

Sure, but you should be careful and be aware of all the potential drawbacks.

For instance, you will have just made a very large gift to someone to whom you’re not related, and you might end up owing gift tax, or at least having to file a gift tax return.

If you have a mortgage, your mortgage might immediately become due in full if you put someone else’s name on the deed. That means you’ll have to refinance, and you might not get as good a deal as you currently have.

If your partner runs into financial problems, a creditor could force the sale of your home.

And remember, if you break up with your boyfriend or girlfriend, you won’t simply get the other half of the house back. Once you give it away, it belongs to the other person.

Does that mean that I should keep the title to the house myself until we get married?

That’s one option. But that can create issues too. For instance, what if something happens to you and you pass away suddenly – do you want your partner to inherit the house? If his or her name isn’t on the deed, you might have to revise your will to make that happen.

If you let your partner live in the house rent-free, the IRS might consider that you’ve made a gift to your partner of the fair-market value of the rent. If that value is more than $14,000/year, you might have to file a gift tax return.

What’s the best way to deal with all these issues?

A good solution is to have a written contract – which you could think of as a “house pre-nup.”

The agreement would address how you’ll own the property; who contributes how much to start; whether both of you will be on the mortgage; who will contribute how much to the mortgage payments; who will pay for taxes, utilities and maintenance; and so on.

Most importantly, the agreement can say what will happen if you split up – will the house be sold, and how will the proceeds be split? If one partner stays in the house, will that partner buy out the other’s share, and how?

Having these things in writing can make the whole process smoother, and protect your legal interests as well.