Q: My friend and I plan to buy a condominium. Both of us are unmarried, and we will be contributing equally to the down payment. My income is higher than my friend's, and I will be paying a slightly greater percentage of the mortgage -- at least for the next few years. Do you have any recommendations as to how we should take title? Can I claim the tax deductions, since it benefits me most?
A: This question is raised quite frequently, especially in the Washington area, where property values have been escalating so rapidly and salaries are high.
In recent years, with the advent of a high rate of divorce and the passage of the Equal Credit Opportunity Act -- which opened up credit opportunities for women -- more and more singles are finding it desirable to share the benefits and burdens of homeownership.
As I have written before, there are three basic ways in which title can be held with another person:
Tenants by the entirety, for husband and wife. Under such an arrangement, both parties own the property jointly, with a right of survivorship. If one party dies, the other automatically owns the entire property, without the necessity of having to go through the probate court for a distribution of the assets.
Joint tenants with right of survivorship, which is similar to tenancy by the entirety, only the parties are not married. If one joint tenant dies, the other will receive the property automatically. They own the property together.
Tenants in common. Here, each has a divisible interest in the property, to the extent of their ownership. It can be split equally, or one person can own a larger percentage than the other.
If you and your friend decide to take title as tenants in common, each of you would be able to use your interest in the property, as you see fit, as long as you do not disturb or affect the other person's interest. You could even sell or mortgage your interest in the property, if you were so inclined -- and if you found an acceptable buyer or lender.
I strongly recommend that you take title as tenants in common. If you were to take the property as a joint tenant with the right of survivorship, serious complications may result if one of you should die while you still own the property.
If death occurs to a joint tenant, the other will automatically get the property, regardless of what you put in your will. Lawyers call this an act "by operation of law."
Thus, under a joint tenant arrangement, it is conceivable that if you die first, and your friend dies shortly thereafter, your investment in the property will be lost to the estate of your friend. I doubt that this is desired by either of you.
You both should enter into a partnership agreement spelling out your respective rights and responsibilities while you are living and own the property. Additionally, it is important to prepare a will, to cover and protect your interest in the property in the event you die. Your will can direct that if your friend is living at the time of your death, your interest in the property goes to your friend.
With respect to the tax question, although the deduction for interest and real estate taxes would clearly give the greatest tax benefit to the higher-income partner, our friends at the Internal Revenue Service will not allow a taxpayer to arbitrarily assign the interest in the real estate tax deduction.
The law allows the deduction for interest and tax payments to the person who pays the money. If one of you pays a higher percentage of the interest and taxes, the IRS will permit that person to take the greater deductions. You should carefully document your payments, and your partnership agreement should spell out this understanding.