Differences in tax liability for joint home owning options?

December 5, 2012 8:18 PM

My partner and I are about to buy a house together, and we're trying to decide how to do this. We're gay, and hence technically unmarried, and we're trying to figure out the tax implications of the different options.

We're trying to decide between two options: (1) joint tenants with rights of survivorship, and (2) tenants in common. The reason we'd want to do with (2) is because with tenants in common, we can specify the amounts of the house we own. And since we put unequal amounts of money down, and we'd like for that to be reflected in the deed. In our state, however, (2) does not come with the rights of survivorship. We have both prepared wills that leave all property to the other person.

So either way, the other person will get their half of the property upon our death, but are there any differences in the tax liability on the surviving spouse? Is there any benefit to do rights of survivorship over specifying someone in their will?

I have a feeling this is a 'no', but I wanted to make sure. And is there anything else we should be thinking of?

posted by Tooty McTootsalot to law & government (10 answers total)

You should meet with a GLBT-focused lawyer who can help advise you on these issues. Until DOMA is repealed, the federal tax hit will apply to all gay couples. The state tax hit will certainly depend on the state you live in and its laws.
posted by Blazecock Pileon at 8:37 PM on December 5, 2012 [4 favorites]

Every state has different rules, I would likely consult with a lawyer. Your statewide GLBT group can refer you to someone.

Also these days often financial institutions have a gay community liaison who is an expert in this. (I know, pretty cool right?) They could talk through options on the mortgage as a same-sex couple.
posted by manicure12 at 8:38 PM on December 5, 2012

Something else you should think of: a person can privately change their will and the other partner would not know. On the other hand, what if you separate but don't sell the house right away - maybe one person stays in the house and pays rent or you jointly rent it out to a third party. Just because you are still business partners relative to the house doesn't mean that it would make sense for other person to inherit the whole thing. Bottom line: nthing talk to a lawyer about this stuff. An accoutant, if you already have one to do your taxes would know if the rules about the stepped up tax basis on inheritance would apply equally to both scenarios.
posted by metahawk at 9:07 PM on December 5, 2012

At least in my state, there wouldn't be any immediate tax difference between those two scenarios (although you may get a nasty automated letter from the IRS related to the mortgage interest deduction, if the lender doesn't report the interest against both of your SSNs and you both take some portion of the deduction... be prepared to demonstrate that together you took no more than 100% of it!).

The difference lies in what happens if one of you dies: with the joint tenancy with right of survivorship, the property never goes through probate. The instant the other person dies, ownership of the property reverts to the surviving tenant — this is my understanding, at least. Tenancy in common, with each partner's half then willed to the other in the event of their death, would go through probate which could take time to sort out. And it could expose their half of the property to claims against their estate, i.e. if they had debts. If they are solvent it may be very low-risk, but it's worth thinking about.

It's definitely worth sitting down with a lawyer and working through your options ahead of time, particularly if you're not going to be splitting everything exactly 50/50 in terms of your investment, because that makes any eventual liquidation that much more complicated.
posted by Kadin2048 at 9:16 PM on December 5, 2012 [2 favorites]

OMG I'm getting PTSD just from reading this question. Cannot stress the importance of meeting with a local attorney familiar with LGBT law & real estate. There are a million little important decisions here, 99.9% of them cannot be listed here, because they're particular to your situation and state.

If you can't afford the lawyer visit, you can't afford to buy a house right now.

Puh-leeze just meet with someone before you pull the trigger.
posted by barnone at 10:28 PM on December 5, 2012 [4 favorites]

This seems like a situation where a trust might be a good idea. Basically, the trust owns the house, and you and your partner "own" the trust, with the percentages and survivorship being specified in the trust document.

As for taxes, obviously you should consult a lawyer/CPA, but I believe the IRS lets you split the deduction however you want, as long as you document it properly and don't try to take more than you are entitled to. What tends to work best is that one partner itemizes and takes all the possible deductions, while the other uses the standard deduction.
posted by gjc at 5:23 AM on December 6, 2012 [1 favorite]

Apart from this other good advice (and I've seen TiC work out well with various kinds of households, and find that the legal work on this is fairly well settled, at least in states like California)... you should ("should"--I know, sorry) get married as well in at least one state that allows it (if you are not already) so that, when one of you gets hit by a bus and the deceased partner's parents sue for the house and it all goes belly-up, at least then there is a great legal case to be brought against the state for gay marriage.

Hoping neither of you get hit by a bus.
posted by RJ Reynolds at 5:31 AM on December 6, 2012 [1 favorite]

Definitely a lawyer and probably a CPA. The biggest problem we've had in the past was the IRS sending a bill after my partner took the deduction while only my SSN was listed on the 1098 for some reason. The CPA took care of that after one quick email from us. We're under a tenancy in common and we're currently working out the lawyerly stuff for wills and approximating a marriage as much as we can in this backwater state.
posted by This Guy at 6:04 AM on December 6, 2012

My partner and I own a house in CA. We went with option #1, although we decided the split would be 2:1 -- survivorship without going through probate was important to us. (The 2:1 is not encoded in any legal document, so if we ever split up she could screw me over and take half the house. I don't worry too much about that.)
posted by phliar at 5:15 PM on December 6, 2012

Thanks guys! We ended up talking out our options with a lawyer and getting the paperwork drawn up.
posted by Tooty McTootsalot at 7:14 PM on January 5