One roommate owns, one doesn't; how to handle?
February 13, 2006 4:25 PM   Subscribe

I own a condo with a mortgage and tax deductions and equity. SO moving in. How do we split expenses fairly? Many other questions about financial logistics.

I've owned a condo for several years and have built up extensive equity between putting in more money and the ridiculous local real estate market.

SO is likely moving in soon, and my life will be much the better for it. Happy Valentine's Day!

It doesn't make sense for both of us to move and get a new place: I have more money than SO does so we just end up with a new problem, we both like the place, SO needs to move anyway because of expiring lease, and the location is great. Also, I just refinanced at a much lower mortgage rate than I could get now, so any move would put us in a downgrade even if I could psychologically accept the loss of sunk costs.

Assume that SO doesn't have the free cash flow to simply pay me for a half-share ownership of the condo, in which case we could just change the title and split expenses down the middle. How do we handle this financially instead?

1) Do we just split the mortgage? If so, what does that do to our tax situation, given that I'm deducting the interest and taxes on my federal taxes? (Odds are that I'll be in a higher bracket, so it would make more sense for me to have the deductions.)

2) How do we handle the fact that a substantial portion of my mortgage check is building up equity? Does SO end up with an ownership interest? (And if so, how much money does SO end up getting when the condo is sold? Or heaven forfend, when SO realizes GOB-style "I've made a huge mistake" and moves out?) Or should we simply treat the equity portion of the bill as my responsibility?

3) If we split expenses some other way (putting her in charge of paying for food, utilities, and the non-deductible condo fee), is this imputed rent income that I need to treat as taxable income? Too, it's hard to add all those smaller expenses up in a way that seems like a fair division, given the size of the mortgage expense.

4) Or do I just say that I'm so thrilled to have my SO move in that I want to handle all of the financial expenses myself? I could afford this to be sure (I'm already paying expenses by myself), but I think SO would actually feel threatened by this.

5) I don't need a prenup for this, do I? SO is an economics major and future heartless lawyer, so it might not be too disastrous if I had to suggest one.

Many thanks, Mefites.
posted by commander_cool to Work & Money (20 answers total)
Basically, based on past relationships, I'd just keep paying the rent even if she was weller-off than you. If you can fiscally do so, it makes a breakup easier, she's happy about it, and you'll get your money back in other ways if you're so worried about how much she's costing you.

Everyone's different, but I can't say unmarried couples splitting rent has ever worked *well* when I've see it attempted.
posted by kcm at 4:35 PM on February 13, 2006

Congrats to you! This is good news. I did the same thing with my SO and it worked out very well.

Don't be in a hurry to do anything legal like putting SO on the house note. That should come later.

Can SO simply split the payment with you as if just splitting rent? That's what we did for years.

Rent as taxable income? Not for you, it is your primary residence, not an income property.

No prenup! Don't do any legal stuff yet. However, sharing expenses with SO is important as SO will feel like a contibutor to the family experience.

You have earned the equity that you have. You've done a good job with it. Obviously you want to share in your success, but wait for a while because SO will have earned it too in time, by helping with bills, upkeep etc. Good luck to you both!
posted by snsranch at 4:50 PM on February 13, 2006

I don't have an answer that will address all your points, but with regards to the equity you're building up, I would suggest that it is perfectly fair for you to keep this for yourself. The benefit of the equity in the house serves to ameloriate the risk of the debt. I have no idea what kind of mortgage you have, but even if you have a 30-year fixed rate you have exposed yourself to some level of interest-rate risk (a lot of risk if you have a floating-rate portion). And even if you set the interest rate risk aside, your equity is at risk if housing prices collapse and your loan goes underwater.

If I were in this situation and wanted to charge something other than zero, I would look in the classifieds and craigslist to gauge market rents and charge your SO some discount to market rate (a discount only because of SO-status, not because economic fairness).
posted by mullacc at 4:53 PM on February 13, 2006

Oh yeah, I would also lump the tax shield in with what I said about offsetting your risk related to the debt.
posted by mullacc at 4:55 PM on February 13, 2006

Avoid all these problems and keep paying for your house. Have her pay a rent that you both agree is fair if you can't get away with just letting her move in. Don't try to split up equity and interest and figure out who gets what with taxes. That's just making work.

As kcm said, you'll save money in other areas (like dates!).
posted by jaysus chris at 5:05 PM on February 13, 2006

a person isn't an income source, so I'm not really feeling the "charge your SO", "get away with letting her move in", etc., vibes. Just warning that it's real easy to become resentful when you mix business/money and love, especially when it makes no sense to (IMO).
posted by kcm at 5:08 PM on February 13, 2006

You may not want to do legal prenup-like stuff now, but don't wait too long. Depending on where you live, once you have lived together long enough to be considered common-law for tax purposes and file this way, your partner will be entitled to 50% of your condo if you split. You may be in love now (and long may it last!) but it's better to be safe than very, very sorry.
posted by meerkatty at 5:09 PM on February 13, 2006

I don't know what makes the most sense financially--that isn't my strongpoint. However, I can tell you what I would probably do.

If she weren't married to me and I were able to comfortably, I would probably just go on paying the bills myself. It keeps everything straight and easy. And, if ya'll live together forever, it's all good. If you don't, then there's nothing to contest during the breakup--she moves out, life goes on.

Perhaps she can pay utilities? Or, groceries? I don't think that's income, as long as she's not handing you money. If she brings home Cheerios, it's not income to eat them.

If she's headed for soulless lawyer status, she'll probably have the money to kick in at some point. If you're together long enough, this won't even remotely matter.

I don't know if you're straight or gay, but the answer might be different. If you're going to attempt to claim partner benefits for her at any point, this may weigh into it. If you're gay and claim benefits, they may well want to see some proof of "domestic partner status". Joint bank accounts, leases, mortage payments, etc. If you're gay, and she's the one, they're going to want to see at least one year's worth of documented living-together-ness before they grant benefits.

Consequently, having her pay into the mortage in a documented way might be to your mutual advantage in a year's time.

If you're straight, you can just get married.
posted by Netzapper at 5:10 PM on February 13, 2006

Response by poster: Thanks to everyone who responded. Some clarifications.

A. She wouldn't be costing me anything other than mild increases in electricity and gas usage. So there would be no financial issue with continuing to pay for everything I pay for now. However, she probably won't like the politics of appearing to be "kept"; assume for the sake of this discussion that this isn't an option.

B. She'll have income, perhaps even more wage income than me if she takes her highest-paying opportunity; I just have more assets. So it's not an issue that she can't afford to chip in, just that she can't afford to buy into existing equity.

C. Mullacc, I have no relevant interest-rate risk. It's a fixed 15-year mortgage locked in at a low rate with no floating portion, and I could pay off the entire mortgage except for the fact that I can do better than the 3.6% after-tax mortgage interest cost through alternative investments.

D. JC suggests "Have her pay a rent that you both agree is fair." I agree with that; I was polling people for what they personally would consider fair. Equity and tax deductions count into that. If she were to pay half of my mortgage payment, as snsranch suggests, I would literally be making a (small) profit, plus then there's the question of whether this entitles her to some equity in the condo, or whether I should be declaring this as income on my taxes.

E. Marriage doesn't appear to be an option for 2006 for reasons we need not discuss here, so it doesn't answer the tax questions raised.
posted by commander_cool at 6:27 PM on February 13, 2006

I would not worry about the tax deduction question. you should take it because that is easiest and if its that big of a deal in the scheme of things, use the amount saved/earned from the deduction to take her on a vacation/surprise her with something nice.

When she moves in, you should just explain to her that you would love it if she could help out with expenses. and in the first few weeks you two should find out if its easiest for her to buy the groceries, pay the electric bill, whatever based on who gets paid when. if you're comfortably paying all the expenses there is no need to break out the chart of accounts and split everything evenly. just keep the lines of communication open and revisit the bills every couple of weeks or evey month and you shouldn't have much of a problem.

If you are still living together in 6 months or a year or one of your incomes has drastically changed then it might be worth it to set out more of a financial plan for the two of you to share in.
posted by iurodivii at 6:44 PM on February 13, 2006

One model I've seen suggested is determining how much each person pays of shared expenses based on the person's ability to pay. So if you two combined bring in some figure A, and she makes 50% of that figure A, then she can pay 50% of your collective living expenses, as can you. If she makes 30% of A, then she pays 30% . . .etc. Now, if you really feel uncomfortable having her pay the mortgage becuase you feel like you're making money off of it, then her 50% or 30% or whatever figure can be made up in paying for other things -- utilities, internet access, garbage service, food -- however you guys are comfortable splitting that up. I used a similar system when I quasi-lived with my boyfriend. I was at his place three to four days a week, and we agreed that I could pay the water bill, since I "lived" there about half the time.
posted by Medieval Maven at 6:54 PM on February 13, 2006

The Alternatives to Marriage Project has a lot of great resources for things like this.

The Alternatives to Marriage Project (AtMP) is a national nonprofit organization advocating for equality and fairness for unmarried people, including people who choose not to marry, cannot marry, or live together before marriage.

Their legal issues page might be a good place to start.

And for the record, "common law marriage" doesn't exist in most states, and for the ones where it does, it applies only to couples who have presented themselves as married. It wouldn't apply in your case.
posted by occhiblu at 7:39 PM on February 13, 2006

Just charge her a modest rent. That's what has worked well for us in my exactly the same situation. She pays no utilities and about a 1/3 of what my mortgage and condo fees add up to.

I understand not wanting her to seem like an income source, but being a sugar daddy is equally creepy. That instills a weird dynamic.
posted by machaus at 7:42 PM on February 13, 2006

I've lived with several SOs (although we were always renting, until now when we're joint owners). When the incomes differed, we set a flat percentage like Medieval Maven describes -- usually like 60-40.

Don't make it as formal as a pre-nup, but I don't think "Oh just pay for groceries once in awhile" will work. A few times she'll fail to chip in and you'll be annoyed. She'll remember that she paid for that expensive dinner the night you forgot your wallet. If you use a flat percentage, there's no discussion necessary and everyone's happier.
posted by nev at 8:12 PM on February 13, 2006

Response by poster: To clarify, I'm less worried about the relationship dynamics of charging her rent (to date, our only financial disputes have been whether she thinks that I pay for too much and whether she thinks I try to pay her back for things she buys for the two of us too often) than about the tax and legal issues. It's nice and healthy where we're each worried that the other is paying too much.

Machaus has the answer I've been leaning towards all along--the only question I have is whether it has tax implications to take money from her to pay for part of the mortgage that I'm deducting interest and taxes for. For reasons not germane to this discussion, I have a small but not insubstantial risk of IRS audit, so I need to be cleaner than Caesar's wife if I'm going to be getting several thousand dollars a year from my SO, and Google's not giving me answers.

(Too, if the money she pays me in rent is taxable, this is an argument I can give her to not contribute to the mortgage without seeming like a sugar daddy. She can instead pay the condo fees and electric and Internet/cable. Maybe that's the solution all along.)

Occhiblu's AtMP links look like they'll be helpful down the line (and raise all sorts of important issues we haven't considered yet), but we're not quite at the commingling of financial assets stage, and there's nothing in their FAQs about this intermediate step between joint renting and joint ownership.
posted by commander_cool at 9:10 PM on February 13, 2006

I own my condo and my boyfriend moved in with me last year, so hopefully this will be useful for you.

My condo is a 1br/1ba, so the only real increase in my monthly expenses by his presence was a slightly higher electric for his showers. However, I did have to purchase an additional parking spot for him (he doesn't have the money to have purchased it himself, and besides that the spot has to be legally attached to a condo unit that is also owned by that person).

I felt that 1/2 of the market rate for renting the condo was excessive - I live in pretty expensive rental market, and I wasn't interested in profiting off of him. So, I figured the $10K that the parking spot cost could be recouped by $450/month rent. It's less than he spent on his old place, although smaller, but much nicer. If we break up, then I will have recouped a good chunk of money from the spot (plus I can resell the spot later if needed). If we decide to get married (i hope so!), then we could AT THAT POINT write a prenup that stipulates his rental contribution, which can then be considered as equity were we to eventually divorce.

The rent income is not taxable, it is just household expense-sharing. If you buy the groceries and she writes you a check for $50, you don't count that $50 as income, do you? Same with rent.
posted by gatorae at 8:55 AM on February 14, 2006

I agree with gatorae - there aren't tax issues here unless you make tax issues - like her writing a check for every other mortgage payment. I'm not sure you even want her to pay condo fees directly. Much better for her to write a check payable to you, and you pay for house-related things.

As for the amount to pay, this is clearly a win-win situation. She should clearly pay less than half of the cost of the condo, but more than the incremental costs of her being there (water and electricity for her hot showers). So somewhere inbetween.

And if you can't agree on a figure because she wants to pay more than you think she should, then maybe some of what she pays you might be put (by you) into an "our money" fund, for things you do together. That way, you wouldn't have to get into discussions about who pays for a fancy dinner out, or a weekend trip.
posted by WestCoaster at 10:36 AM on February 14, 2006

I'd go with what the Maven suggested: find out how much more you or she makes and have her pay her percentage towards utilities, groceries, etc. You keep paying for your condo and it's miscellaneous costs. I did something similar a while back and it worked out fine. Later on, should you get married, you can revisit the financial arrangement.
posted by deborah at 12:52 PM on February 14, 2006

Some friends made an arrangement in which they established a bank account for 'household expenses' to which they both contributed and from which mortgage, taxes, maintenance etc. were all paid. The beauty of it was that there was a considerable surplus in the account which they spent on doing stuff together--restaurants, weekends, buying furniture etc. My friends contributed fifty fifty but that doesn't have to be the case.
posted by thayerg at 7:14 PM on February 14, 2006

Response by poster: Implementing thayerg's suggestion would have some severe legal implications in several states, may create tax problems, and is not a solution if the couple isn't ready to commingle finances.
posted by commander_cool at 8:56 AM on February 15, 2006

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