Author Topic: Getting married and buying a share of soon-to-be DW's house  (Read 1031 times)

SquarePeg

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Getting married and buying a share of soon-to-be DW's house
« on: February 08, 2022, 07:20:16 PM »
Hi all, I wasn't sure if this should go in this subforum or Real Estate and Landlording, but here it is...

I'm also not sure how much detail to include, not knowing which details are relevant. In a nutshell:

  • My soon-to-be DW owns a house since around 2012.
  • We're doing a remodel project on it to make it suitable for the two of us to live in, paid for with equity pulled out in a refinance she did for the project.
  • Once the remodel project is done, I plan to move in and sell my own house.
  • I purchased my house in 2008 (oops) and anticipate ending up with approximately $250,000 to $300,000 from the sale. Calculation: (Zestimate - mortgage principal balance) * 0.9 (The last factor is intended to cover 10% transaction costs, which I remember as a rule of thumb I read somewhere.)
  • The current plan is for me to take those proceeds and make a giant payment on the mortgage of DW's house.
  • This amount is near enough half the value of DW's house that we both feel this is fair and equitable.
  • We are in Washington state, a community property state.

So, my questions, financial (taxes and to a lesser extent, optimizing from an investment perspective) and legal:

Will I incur a big tax liability with this plan?

At what point in this process should the legal marriage take place?
  • I'm primarily interested in avoiding shooting myself in the foot tax-wise. Mainly federal but there may be WA state tax considerations as well?
  • But also legal ramifications if we were to get divorced. (We're in our forties and have been dating for 12 years, so hopefully not, but who knows.)

Also, from reading this forum for a while, I know many folks would take the lump sum and invest it rather than plow it into the mortgage, with the goal of making more money with the investments than the interest being paid on the mortgage. (I don't know the exact rate on the refinanced mortgage but I think it's pretty low, historically speaking.)

However, putting the proceeds from my house directly into "our" house seems cleaner and more straightforward to us. Plus it enables the possibility of paying off the mortgage earlier or even refinancing to a 15-year term. (Would that make sense? Is there such a thing as a "cash-in" refinance?) And whether or not to put the money into the mortgage relates to the legal question above, i.e., if I kept the money out and invested it, what rights would I have as far as the house goes if the marriage ends?

So, the questions are kind of entwined and I don't have much knowledge in these areas. Any advice or pointers to resources would be very appreciated! I'm also happy to provide more relevant details. Thanks!

Dicey

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #1 on: February 08, 2022, 08:12:21 PM »
Not qualified to answer your tax questions, but I am a card-carrying, Certified Member of the DPOYM Club.

However, in this case, paying your partner for their equity isn't the worst idea ever. As long as you do it all nice and legal like so nobody gets hurt.

Once you have all the I's dotted and T's crossed and everything's all nice and even and comfy and all that, I'd still consider a cash-out refi rather than early payoff, but there's plenty of time to sort that out at some future point.

Hmmm, what about her equity? You're contributing half of what the house is worth now? If so, what metric are you using to determine the value? If I'm understanding that correctly, please, please, please make sure you do all the right legal things, for both of your sakes.


Tyson

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #2 on: February 08, 2022, 09:14:00 PM »
Before sinking all the money into the mortgage, how are you doing with your other investments?  Do you have enough money saved/invested that you could live for a long time (and continue to make your mortgage payments) if one or both of you lost your sources of income?

SquarePeg

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #3 on: February 08, 2022, 10:19:27 PM »
Hmmm, what about her equity? You're contributing half of what the house is worth now? If so, what metric are you using to determine the value? If I'm understanding that correctly, please, please, please make sure you do all the right legal things, for both of your sakes.

Well, this is where the math got a little confusing, hence my "near enough" statement... She bought the house in 2012 with a 20% down payment and mortgage. So she's been paying toward the equity for these 10 years. We didn't try to actually figure out the exact amount paid toward principle, etc.

Our metric for the house value is that there was an appraisal done as part of the cash-out refi. The figure I quoted for what I am hoping to clear from my house sale is about half of that. A bit less if the proceeds end up on the low end of my estimated range.

Based on this admittedly sloppy dead-reckoning, we felt like we'd each be in for roughly the same amount, and going forward we'd split the monthly mortgage (and other bills), so over time our contribution would tend toward being even more "even."

Admittedly, this is a little loosey-goosey, so I'm open to hearing what problems you can point out. I can't tell though, are you worried about me putting in too much, or her?

SquarePeg

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #4 on: February 08, 2022, 10:26:18 PM »
Before sinking all the money into the mortgage, how are you doing with your other investments?  Do you have enough money saved/invested that you could live for a long time (and continue to make your mortgage payments) if one or both of you lost your sources of income?

I'm in pretty good shape with my investments, so much so that I'm considering some sort of coast-FIRE plan after all this is settled. She's a little behind where I'm at since she's a little younger and hasn't been saving as aggressively, but still has a decent chunk in both retirement and a taxable brokerage account.

As far as making payments (and other bills), we determined that we could handle that on one of our salaries, so we'd be okay in the event of a single job loss. With two it would be tougher -- cash reserves will be pretty depleted once the project is done. Thinking about it, I'll consider keeping out whatever it will take to make up a decent "emergency fund" for that type of situation.

Longer term, we are both pretty well qualified professionals in fairly in-demand fields, so I estimate the chances of both of us involuntarily out of work for a long time to be pretty small.
« Last Edit: February 08, 2022, 10:29:51 PM by SquarePeg »

Tyson

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #5 on: February 08, 2022, 11:00:17 PM »
Before sinking all the money into the mortgage, how are you doing with your other investments?  Do you have enough money saved/invested that you could live for a long time (and continue to make your mortgage payments) if one or both of you lost your sources of income?

I'm in pretty good shape with my investments, so much so that I'm considering some sort of coast-FIRE plan after all this is settled. She's a little behind where I'm at since she's a little younger and hasn't been saving as aggressively, but still has a decent chunk in both retirement and a taxable brokerage account.

As far as making payments (and other bills), we determined that we could handle that on one of our salaries, so we'd be okay in the event of a single job loss. With two it would be tougher -- cash reserves will be pretty depleted once the project is done. Thinking about it, I'll consider keeping out whatever it will take to make up a decent "emergency fund" for that type of situation.

Longer term, we are both pretty well qualified professionals in fairly in-demand fields, so I estimate the chances of both of us involuntarily out of work for a long time to be pretty small.

OK, good you've at least thought about it.  I've wrestled with this question myself.  I had a period where I had paid extra toward my mortgage but didn't have enough saved up in the form of investments, and then I lost my job and it took 9 months to find a replacement.  There was a time where it looked like I might default on my mortgage.  Either that or I'd have to raid my 401k and pay some seriously stiff penalties for it.  I thought that it could never happen to me (and then it did). 

PDXTabs

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #6 on: February 08, 2022, 11:06:04 PM »
Before sinking all the money into the mortgage, how are you doing with your other investments?  Do you have enough money saved/invested that you could live for a long time (and continue to make your mortgage payments) if one or both of you lost your sources of income?

I'm in pretty good shape with my investments, so much so that I'm considering some sort of coast-FIRE plan after all this is settled. She's a little behind where I'm at since she's a little younger and hasn't been saving as aggressively, but still has a decent chunk in both retirement and a taxable brokerage account.

Mathematically speaking, it might make more sense for her to refi out all but 10% of her equity (into a joint mortgage with you) and for you to throw in 10%. Then she could invest her monies into equities. Don't forget to get your name on title. I know WA is community property but... it's complicated. FWIW you could, if you wanted to, get a legally enforceable prenup but WA is different than some other states with regards to specifics.

SquarePeg

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #7 on: February 09, 2022, 08:29:07 PM »
OK, good you've at least thought about it.  I've wrestled with this question myself.  I had a period where I had paid extra toward my mortgage but didn't have enough saved up in the form of investments, and then I lost my job and it took 9 months to find a replacement.  There was a time where it looked like I might default on my mortgage.  Either that or I'd have to raid my 401k and pay some seriously stiff penalties for it.  I thought that it could never happen to me (and then it did).

I see what you're getting at. One benefit of not plowing the whole sum into the mortgage is flexibility and a better chance of being able to deal with unforeseen circumstances. Makes sense and I'll definitely give it more weight in the decision-making than I might otherwise would have. Thanks for your thoughts!

SquarePeg

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #8 on: February 09, 2022, 08:33:34 PM »
Mathematically speaking, it might make more sense for her to refi out all but 10% of her equity (into a joint mortgage with you) and for you to throw in 10%. Then she could invest her monies into equities. Don't forget to get your name on title. I know WA is community property but... it's complicated. FWIW you could, if you wanted to, get a legally enforceable prenup but WA is different than some other states with regards to specifics.

That's an interesting idea. I'm not sure I could sell her on it, but it's worth considering.

As far as the legal questions go, I was thinking about it today and I realized I have a benefit at work that allows me to connect with a lawyer or legal advisor for a short consult. I'm going to look into scheduling one, and hopefully they'll either be able to quickly sort me out or point me in the right direction, either for my own research or a legal resource to tap.

talltexan

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #9 on: February 10, 2022, 07:21:19 AM »
Your soon-to-be-wife has been paying toward the mortgage for ten years.

Suppose you pay in enough (in a lump sum) that you can refinance to reduce the remaining term by ten years, while keeping payments at the same nominal amount. Does that sound equitable?

The advantage is that there's no need to calculate equity.

If that leaves money left over, put that money in something like Vanguard Wellesley and take some out periodically for maintenance/expenses.

Like @Dicey , I'm a member of the DPYM club who also takes seriously finding marital harmony.

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #10 on: February 10, 2022, 07:45:17 AM »
My advice would be:

1) Start with the market value of the house now.  What has been paid by your fiancee in the past is irrrelevant.
2) Each of you should contribute half of that amount as a capital cost.  Whether you do it by paying off the mortgage or just giving the money to your fiancee or some split of the two is irrelevant.
3) Each of you pays exactly half of whatever mortgage payments are made from now on, at the same times.
4) You also split the maintenance and running costs equally.
5) You have a lawyer put both the ownership papers for the house and the loan agreement for the mortgage put in both your names, with equal shares (although for the mortgage probably each of you will be legally liable for the full amount, that's how lenders make sure to get their money back).

Tyson

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Re: Getting married and buying a share of soon-to-be DW's house
« Reply #11 on: February 10, 2022, 12:06:31 PM »
Your soon-to-be-wife has been paying toward the mortgage for ten years.

Suppose you pay in enough (in a lump sum) that you can refinance to reduce the remaining term by ten years, while keeping payments at the same nominal amount. Does that sound equitable?

The advantage is that there's no need to calculate equity.

If that leaves money left over, put that money in something like Vanguard Wellesley and take some out periodically for maintenance/expenses.

Like @Dicey , I'm a member of the DPYM club who also takes seriously finding marital harmony.

Good point.  Marital harmony is something to strive for.  And it may involve paying extra to the mortgage to make the perception of fairness happen. 

But in truth, once you are married, it is no longer 'her money' and 'my money'.  It's all 'our money', and you should start to think of ALL the money as a shared resource and then figure out the best way to optimize your financial future together. 

 

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