Property ownership rights
The way your home's ownership is legally recorded isn't based on your mortgage; it's based on your deed, which records and transfers title for that home. Depending on where you live, you can designate ownership in a number of ways:
- Sole ownership: In this case, one of you has sole control over the property, which means you're the only one who can sell or borrow against it.
- Joint tenancy: With joint tenancy, two or more people can control the same home and have the right to sell or borrow against it. This means both you and your partner can take the real estate title to your first home together even if you're buying it before getting married.
- Tenancy in common: Under this setup, more than one owner can take title to a home, and then each owner can borrow against his or her share. You and your partner don't have to own equal shares of the home you buy.
When you own a home, you can deduct interest on up to $750,000 in mortgage debt. Now when your tax status is married filing separately, you and your spouse can each take a deduction for interest on up to $375,000 in mortgage debt. But when you own a home together and aren't married, one of you is out of luck. That's because the IRS will only allow one of you to claim a mortgage interest deduction, which means that if you and your partner both want to itemize on your tax return rather than claim the standard deduction, someone loses out.
Of course, this issue will resolve itself if you and your partner eventually get married. At that point, you'll have the option to file a joint return, or even file separately so you can each snag that tax break. But if you're not planning to get married for a number of years, it could make for an awkward, not to mention stressful, situation during tax time.
There are also capital gains taxes to consider. When you sell a home for more than what you pay for it, you're liable for taxes on your profit, which is known as your capital gains. However, the IRS allows you to exclude $250,000 from the sale of your home for gains tax purposes if you're single, or up to $500,000 if you're married. This means that if you buy a home for $300,000 and sell it years later for $600,000, as a single tax filer, you're only paying capital gains tax on $50,000.
However, just like the IRS won't let two unmarried people each claim a mortgage interest deduction, so too won't it let unmarried homeowners each take a capital gains exclusion. This means that if you sell your home prior to getting married and have a large gain, only one of you might benefit from a tax standpoint.
Map out your financial obligations and responsibilities before you buy
If you're going to be buying a house before marriage, you and your partner will need to talk things through and figure out exactly who will be responsible for the different financial aspects involved. Here are some questions to answer together:
These are important questions to answer if you'll be buying a home at a point in life when you aren't married and therefore are not combining your finances.
Another important question to contemplate: What will happen if our relationship dissolves? Will one of us buy the other out? Will we sell the home together and split the proceeds (assuming that home can be sold at a profit)?
Remember, you and your partner may have every intention of getting married, but sometimes, relationships fall apart. In fact, sometimes, living together is what makes you realize that staying together isn't the right thing for you. As such, you need a solid plan for owning a home together, and you also need a solid exit strategy.
But don't just hash these things out verbally; speak to an attorney together about putting them in writing as necessary. That way, if things do go sour, there will be fewer legal matters to argue over.
Ultimately, buying a house before marriage can work out well -- or it can backfire. Weigh the pros and cons before making your final decision.