Buying a house together

January 24, 2011 11:00 PM

Buying a house together-run into a roadblock and need input

Here is the scenario we have run into--

A couple decides to buy a house. Lets call them A and B

A puts l00K down payment
B puts no down payment
House costs 400K

The deal is that B will pay the entire monthly mortgage till the cost to B reaches the $100k amount. Now here is the question

Let’s say B's mortgage payment will be 1500 and she will a get tax break at the end of the year because of the mortgage payments she makes. So, A thinks that B should not include the tax savings from the monthly mortgage payment she is making, to reach the 100K amount

B does not agree. She believes that she is getting back money from the government which it takes from her salary. She thinks that if she does count that towards the 100K then she is actually paying the mortgage plus the salary refund she gets from the government.

Who is right here?

posted by pakora1 to Human Relations (25 answers total)

I think the refund from the government should be split equally between the two parties. To achieve this practically, B should count half the refund towards the 100K.

I also think if the couple can't agree on something small like this and insists that everything be split so exactly 50/50 down the middle without compromising, said couple is not ready to buy a house together.
posted by hazyjane at 11:07 PM on January 24, 2011 [41 favorites]

Wow, I agree with hazyjane.

A 30 year mortgage is a long time. Even if you do a 15 year mortgage, 15 years is still a long time for any relationship. You didn't mention if you were a couple of friends, a romantic couple (boyfriend and girl/boyfriend), a married couple, engaged couple, etc. Besides A and B, are there also any C's and D's living in the house (dependents or potential rent-paying people)? Are you married filing jointly, or will you be filing separate tax returns?
posted by rybreadmed at 11:14 PM on January 24, 2011

Sure, B is getting back money that was taken from her salary - but A also had money taken from his/her salary, and is NOT getting extra money back. And A is taking on that disadvantage because of the "A pays up front, B pays later" payment structure. If you were splitting 50/50 the up front cost, and splitting 50/50 the "later" payments, then A would be getting some more of his/her salary money back each year.

Two additional things to consider:
1. What are the tax implications for A of selling stock or cashing out an IRA or whatever they did to get the down payment money? If A takes a tax penalty (such as paying capital gains tax) would you (jointly) want to consider that as part of what needs to be equalized?

2. Does the "up front vs later" payment split mean that B will be keeping some money in investments, while A will be cashing out his/her investments? The person who puts in money up front stands to lose money they could be making in interest from other investments. Think about how to make this fair.

If you're going to do this, be sure that you have talked to a lawyer and probably tax advisor too, and drawn up a written agreement that lays out all the costs and how you are agreeing to split them.
posted by LobsterMitten at 11:23 PM on January 24, 2011 [1 favorite]

Response by poster: (We are unmarried, bf/gf. No others living in the house, no kids.
posted by pakora1 at 11:24 PM on January 24, 2011

A and B understand they can only take the mortgage *interest* off their taxes, right? (I am assuming A and B live in the US.)

I think A and B need to talk to an attorney and put this arrangement in writing, because what happens if one of them, say, dies, and has a crazy relative who wants the house? For that matter, do A and B know how to express this arrangement to the IRS?
posted by gingerest at 11:35 PM on January 24, 2011

The solution to a boyfriend/girlfriend buying a house "together" is that A buys the house and B signs a short-term automatically renewing lease and pays rent, adjusted to account for the fact that B will not be getting equity. Co-ownership of the house gets complicated if the relationship goes south. With that large of an asset, lawyers are likely to get involved. With a lease, A can just give B whatever notice the lease and the law require.
posted by indyz at 11:37 PM on January 24, 2011 [4 favorites]

Of course, my solution assumes that if B leaves the picture, A has the ability to carry the mortgage.
posted by indyz at 11:39 PM on January 24, 2011

I agree that any tax breaks should be shared equally.

What you're trying to do with this payment plan is to make a situation where you split the cost 50/50. But for whatever reason you've decided to do it asymmetrically, and there's some benefits happening during the later part of the payment. The benefits should be split, just like the cost is.

Imagine a world where A puts down 100k on a 200k mortgage, then B starts paying off the rest until they've paid another 50k. Then due to a bank error (ha!), the rest of the mortgage is forgiven. I think it's obvious that it shouldn't be only B that reaps the benefit of this, and that B would give 25k to A to make their contributions even at 75k each. The same principle should apply to your situation.
posted by auto-correct at 11:40 PM on January 24, 2011

It's going to take 5.5 years for B to contribute $100k. In that time, at 3% annual interest (?), A could have earned over $16k on their $100k. Instead they are earning $0. Another way of thinking about it is that they are already splitting the interest that accrues on the additional $100k that B had to borrow. So I tend to think that it's B's turn to be generous.

If you're really interested in going halvies, why not imagine two separate loans, each for half of the purchase price? You could then calculate the lifetime cost of each loan based on who pays when, and keep playing with the spreadsheets until someone is covering every month. (Remember not to start A's payments until basically year 6, interest accruing all that while... and come to think of it, it's that interest that B is paying and getting refunded.)
posted by salvia at 11:47 PM on January 24, 2011

Pay off the house as quickly as possible, with both parties contributing as much as they can.

Track contributions in a spreadsheet, know what percent has been paid by each party. That's the percentage of the equity owned by each party.

Once the house is paid off, contribute jointly as desired to other things that benefit the couple, or to individual investments. Enjoy all the benefits of not paying the interest you would have paid had you taken the entire length of the mortgage to pay off the loan.

Create a contract specifying that the percentage of equity in the house "owned" by each party corresponds to the percentage contributed, based on such-and-such a record, to the house _and_ the joint couple fund, etc., and in case of unavoidable break-up, refer to this contract to settle assets. Split the house and other joint investments as recorded, keep individual investments.

Use the spreadsheet to split the "interest" parts of payments equitably, and apply mortgage interest deductions accordingly.
posted by amtho at 12:09 AM on January 25, 2011

I understand B's annoyance, but I think her logic is faulty. Suppose the tax savings is 250 per month. So the mortage expense is equivalent to renting a place for 1250. If you compare rent vs mortage and count it as a savings, it's a savings!

On the other hand, calculating that savings is going to be tricky. It's just an itemized deduction, and you have to compare it to the standard deduction you would have got otherwise. That is, you're not saving (tax rate * mortgage payments); you're saving (tax rate * excess of itemized deductions over standard deduction).

(Who pays the property taxes, by the way, and who gets the deduction for those?)

Also, what the heck happens to equity? Almost all of the interest B pays till reaching that 100K level is going to interest. Suppose you had to sell the house at that point; you'd own not terribly much more than 100K worth of the house... would A feel that he gets the 100K back?
posted by zompist at 1:39 AM on January 25, 2011 [1 favorite]

I'm inclined to agree with amtho. Pick a mortgage that allows overpayments and both pay as much as you can afford; early on, and at a time of unusually low interest rates, it's wise to pay it off quickly. If you stay together forever and ever, it matters not one bit who paid most towards the cost of the house. Just agree to keep track of the contributions you each make, and agree to split the proceeds of any sale based on the ratio of amounts contributed. Quibbling over tax breaks is overly complicated.

Later on, if you have children or there's some other major life change, you may wish to reconsider how ownership is distributed.
posted by le morte de bea arthur at 1:47 AM on January 25, 2011 [1 favorite]

Pick a mortgage that allows overpayments and both pay as much as you can afford...

...after you have secured a sizable emergency fund. If you fall on hard times and have trouble paying your mortgage, all those extra payments won't help you. Make sure you have three to six months of expenses saved.
posted by sexymofo at 2:50 AM on January 25, 2011 [1 favorite]

My partner and I have a scenario somewhat like this, although we're not counting pennies as strictly as you guys are. For what it's worth, our solution to the mortgage interest deduction is to just alternate years. One year he gets the amount saved, one year I do. Works fine for us. Admittedly we're pretty loose about this stuff, figuring we've been together a decade and it probably all evens out in the long run.

Also, having done the unmarried-with-jointly-owned-home thing for several years now... This is just the beginning. You're going to have tons of shared repair and maintenance expenses. You'll be a lot happier if you can come up with a general plan early for this kind of thing and not bicker about it every time some new expense comes up.
posted by Stacey at 2:51 AM on January 25, 2011 [3 favorites]

We split the mortgage deduction 50/50 even though my wife hasn't been able to pay her share of the mortgage for years, due to loss of a job. We keep track, and when she gets her inheritance we'll settle up. Several people have said this, but you guys have bigger issues that you'll need to work out, because this will never end. How is your deed recorded, BTW? Joint tennantship in common?
posted by fixedgear at 3:22 AM on January 25, 2011

Who is right here?

If "right" means 'whose solution will actually result in a 50/50 split of contributions?' then neither of you is completely right, but B is considerably more wrong. The idea that money that ends up in her pocket (the part of her tax refund that's due to mortgage interest deduction) should be treated as if it were not actually in her pocket is silly. This would not be money she'd spent on the house; it would be money she'd briefly lent to the government.

I think you should reconsider whether a 50/50 split like this is really important. Indyz' A leases to B solution sounds pretty good to me. Amtho's spreadsheet keeping track of equity percentages is also a good idea. 50/50 is not going to be easy to achieve, and the effort might make the whole relationship feel unbalanced for a long time while you're trying to achieve it.
posted by jon1270 at 3:42 AM on January 25, 2011 [1 favorite]

Amtho has the best idea! The longer you are paying for the house, the more expensive it will be period. You will pay much more interest if you just make the payments set up by the amortization schedule.

It seems a much better idea to split the monthly payments and pay the house off as quickly as possible (split the interest deduction--if that's possible). Then when the house is paid off, know that B still needs to give you $50,000 to have equal equity.

That said, buying a house together may be a bigger commitment than getting married (especially a marriage with no common property). Make sure it's all settled prior, because money issues and inequities (perceived or real) end relationships!
posted by Kronur at 4:04 AM on January 25, 2011 [1 favorite]

The deduction is a benefit of buying a house, not of writing a check each month. You both are on the hook for the mortgage payment, you both own the house; you both "own" the deduction.

You both bought a house, you paid $100,000 worth of your share in early. Why should you lose the benefit of the deduction for paying early?

Or, look at it this way: separate the two transactions. One transaction is buying a house together: expenses, profits and losses split evenly. You each write a check every month for half the mortgage payment, as does B. The other transaction is B borrowing $50,000 from you in order to cover B's half of the down payment. B writes A a check each month to pay off the loan, which for convenience is equal to the amount of the mortgage payment.

Should the arrangement end early, for good or for bad, both transactions are settled up separately. House is sold; profits or losses are split. B owes A the balance of the loan.

Questions: how will you account for profit and losses should you have to sell the house? Split profits and losses 50/50? Or based on % equity? What counts toward money put into the house, versus regular expenses? A new roof? A new refrigerator?
posted by gjc at 5:41 AM on January 25, 2011 [1 favorite]

Buying a house is an extremely big decision, and one that should not be taken lightly. It's only become a recent (history is a long time) feeling that the normal path in life is to own a house. Not everyone should own a house, and you may mean well now but if this entire position goes south you may be posting to AskMeFi in two years a "So A and B bought a house together and now they don't want to own it together anymore. Help!"

If you're confident that you two want to go down this path you either need to allow for money to be lost with a shrug of your shoulders (water under the bridge) and/or you need to draw up a contract so that future discussions/arguments are centered around your business agreement and not raw emotions at that time.

Good luck!
posted by zombieApoc at 6:22 AM on January 25, 2011

I noticed that earlier someone took into account the money that was lost to A via unrealized interest, which leads me to what I think might be fair while trying to continue with the flow of the tax break.

A puts 100k up front, remaining mortgage is 300k, mortgage payment is 1500, interest isn't noted. Let's assume 3% for simplicity. Of the first mortgage payment that B makes of 1500, 750 of that goes to interest, and 750 pays off the loan. The next payment pays of $748.125 in interest, and 752.875 towards principle. Etc. The tax break is only based upon the interest payment. However, if B keeps making the payments until B has paid of $100K in principal, B keeping the interest deduction seems more than fair.

However note this will take B approximately (very approximately) 9.5 years instead of the 5.5 years if one just considered total cost (and if the rate is 5%, it's closer to 20 years than 10). Also note that if A is able to make payments, and A and B end up in the long haul, a lot of money (more than 70k) goes to the bank while A waits for B to catch up to the intiial 100k.

I think the best approach is to track how much both A and B contribute to the principle of the house, and develop a sane payment plan that allows you to have an emergency savings, but also cuts down on interest. If you end up in the long haul, many couples join incomes, and you two might consider dropping the accounting (or you might not, and write up the principal splitting into the pre-nupt). If you end up splitting up, then you can track who gets what from the eventual sale of the house via principle paid.
posted by nobeagle at 6:27 AM on January 25, 2011

I think hazyjane nails it.

This sounds like a very bad way to start on such a long term project like house ownership.
posted by freakazoid at 7:43 AM on January 25, 2011 [2 favorites]

B should deduct her tax savings in full from what is counted toward the 100k. Alternatively, you could have her count her full payments but then pay you 100% of the money she is refunded based on the mortgage interest deduction, come April 15. That would square things.

hazyjane doesn't nail it; her solution doesn't add up mathematically. It doesn't benefit A at all; it merely reduces B's benefit by half.

The money B is refunded is money she is not actually spending. john1270 is right, it's just money she's briefly lent to the government.

If you go with B's plan, she is getting a double benefit. One, she's essentially taking out a 100k loan from you without paying interest. Two, she gets to count toward her 100k a sizable chunk of money that she's actually getting back! That's a ridiculous arrangement unless A is fine with being very generous, in which case kudos to him.

That said, I disagree with those who say this disagreement signals bad things for your relationship. You should hash this out, and get it on paper, too. Relationships are hard enough without having lingering money matters around that might breed resentment. And if things at some point go badly between you and her, you'll be glad that the business side, at least, was sorted from the get-go.
posted by torticat at 12:50 PM on January 25, 2011 [1 favorite]

Oops. Last sentence there, I should have said "if things go badly between A and B." Don't know why I was assuming A was the OP.
posted by torticat at 12:51 PM on January 25, 2011

To shorten my answer above: The current plan is unfair to A. B is asking for more in their favor. You need someone with financial knowhow and a spreadsheet to help you figure this out, if you want a fair division in half. I'd ask a banker or financial planner to make a spreadsheet showing what it would look like if each of you got a loan for half the amount (ignoring PMI or anything that would result from B's lack of downpayment). You could also ask them to do it in a way that would allow A to receive savings if they made payments early, as others here have suggested (i.e., if A paid off their half of the loan faster, their half of the loan would accrue less interest, and that savings should go to them, and the same for B). Good luck - sounds like a fun project!
posted by salvia at 1:44 PM on January 25, 2011

This is a spreadsheet problem, with some of the variables being how long the mortgage is, whose name is on the title, and how you plan to split other, on-going expenses.

Depending on what state you live in, marrying and your subsequent titling options, could make a BIG difference in rights and taxes should one of you die.

Titling in general is something worth thinking hard about, at least in California.

It might be worth paying a financial planner for an hour's time to go over all the potential snares and goodies you might not be thinking of.
posted by small_ruminant at 3:16 PM on January 25, 2011