Need help thinking through property ownership with partner

[FireOnTheMuffin]

I need help thinking through the finances of our home ownership with my partner.  We are not married, and we keep separate finances, but I manage them for both of us.  My goal has always been for things to be fair 50/50.  In 2014, I bought a house in my name only, which we lived in.  The intention was always for it to become a rental when we found a "forever home". 

In 2017, we found a house we thought we liked and we had it titled/mortgaged in his name only, bought for $854k.  I contributed half the down payment, and since then have always paid for our other life expenses equivalent to the mortgage/taxes/insurance, which he pays 100%.  Along the way, we decided we don't like this house and have since bought another place in both our names.  Anticipating this, in late 2021, we changed the title of the 2017 house to be 50/50 and he wrote a loan note to me for $550k, which we feel was a reasonable estimate of 1/2 the house price at the time ($1.1M).  This was because we realized without me on the title, we'd be missing out on $250k of cap gains exclusion.

We are now planning to sell the 2017 house in 2025.  I estimate the house to now be valued at $1.5-1.6M.  Since signing the loan note between us, I have continued contributing our life expenses as always.  To keep things fair, does it make sense that the loan amount should have been paid down by the amounts I've been contributing? 

When we sell, does it make sense that 100% of the outstanding mortgage should be paid out of his half of the proceeds, and then the remaining amount of the outstanding note amount between us be transferred from my proceeds to him?  Somehow, following this process, the end proceeds to him are still a lot more than to me. 

We are planning to spend a ton of the proceeds on a major renovation of our new place, so maybe it doesn't matter?

[aasdfadsf]

It's kinda hard to parse this. You and your partner can either marry or declare yourselves civil partners and just accept that all assets are coequal, or you can have an ongoing accounting headache. I am unsure of what advice there can be other than that you and your partner have to agree between you on how to account for things.     

[spartana]

wow this seems very convoluted (and risky as non-married people). But I suppose you could just add up what each of you actually paid - him to the morgage,  you to the living expenses, plus the amount each paid of the down payment, taxes, insurance repairs, buying and selling costs, etc - while owning the place and split that total amount 50/50 (one may owe the other more or less depending on what the total amount comes to and how much you each actually paid towards expenses). IIRC you guys have 2 kids so that may factor into your costs and accounting too.

As for the "risky" issue - I say that because as unmarried joint owners you may have to deal with some big financial issues if you separate (or one of you dies) and the property is in his name only.

[Villanelle]

Did you discuss any of this when you/he bought the house, or when he issued the loan?  What was the conversation like then?

If I'm understanding correctly, you all split life expenses, with him paying the housing costs and you paying the other expenses.  Assuming those were roughly equal then it seems to me like your overall life costs, including the house, have been split equally.  So the proceeds of the home should be, too.  That means if it sells for $1.5, you each get $750k.  He uses his to pay off his mortgage and you use yours to pay off the loan you have from him. 

If the amount you've been contributing to life is significantly less than the amount  he's been paying for the house, I'd base the split on that proportion, perhaps.  So if you've been paying $1000/mo and his PITI costs are $1500, then you get 2/5 of the $1.5 and he gets 3/5, which you each use to pay off the loans.

Also, either find a different method going forward, or have a much more clear agreement between the two of you. In general, it seems like it would be better for either both of you to own the home equally and split expenses, or one of you to own it and the other to pay a modest "rent". Muddyig the waters makes things, well... muddy. 

[Metalcat]

I would 1000% consult a lawyer on this.

[spartana]

I would 1000% consult a lawyer on this.

Or do what I do as non-married SOs - his and hers places!

No kids and wanted to leave our individual assets to our own siblings but found it hard to do that if we were both titled on a place owned jointly due to both real estate and inheritance laws in my state of Calif. It's a PITA sometimes and he'll be selling his place this summer but will likely buy another he can airbnb or rent out. If he dies or we break up  I'm not entitled to it and vice versa on my place.  But yeah, running that stuff by a lawyer is pretty valuable. Especially for unmarried parents and multiple houses and FIRE related stuff.

[FireOnTheMuffin]

@aasdfadsf, not getting married just for this.  Marriage has all sorts of financial implications.

@Villanelle, I think your approach sounds logical.  I should get credit for my contributions back to the beginning with the downpayment and our expenses even from before the 2021 note, as those were like undocumented loans to my partner.  If I use those, which I've kept track of, as credits on the note, the end result at sale ends up more even.  @Metalcat, indeed I should check with a lawyer, though unlikely the IRS would bother to look into our details here beyond what we claim for capital gains and exclusion.

@spartana and everyone, yeah, I realize this got convoluted.  We did discuss, but back then we thought well, I have 1 house, so you get 1 house.  We didn't think it through hard enough, I guess.  Mistakes were made!  Possibly we also had strategic reasons back then to keep them in separate names.  I was still working, and considering buying more real estate with mortgages for eventual rental, and a lot of banks limit the number of properties you can have to 4?  More didn't end up happening though, and I ended up contributing half of all our expenses.  And then it wasn't until 2021 that I thought we needed to do something to fix it, at least to capture more of the capital gains exclusion we should get.

Luckily, this house will be sold and the new house was properly purchased in both our names, so it won't be a long-term confusion.

[Villanelle]

@aasdfadsf, not getting married just for this.  Marriage has all sorts of financial implications.

@Villanelle, I think your approach sounds logical.  I should get credit for my contributions back to the beginning with the downpayment and our expenses even from before the 2021 note, as those were like undocumented loans to my partner.  If I use those, which I've kept track of, as credits on the note, the end result at sale ends up more even.  @Metalcat, indeed I should check with a lawyer, though unlikely the IRS would bother to look into our details here beyond what we claim for capital gains and exclusion.

@spartana and everyone, yeah, I realize this got convoluted.  We did discuss, but back then we thought well, I have 1 house, so you get 1 house.  We didn't think it through hard enough, I guess.  Mistakes were made!  Possibly we also had strategic reasons back then to keep them in separate names.  I was still working, and considering buying more real estate with mortgages for eventual rental, and a lot of banks limit the number of properties you can have to 4?  More didn't end up happening though, and I ended up contributing half of all our expenses.  And then it wasn't until 2021 that I thought we needed to do something to fix it, at least to capture more of the capital gains exclusion we should get.

Luckily, this house will be sold and the new house was properly purchased in both our names, so it won't be a long-term confusion.

You should consult a lawyer for far more than just the tax implications of this.  If you broke up tomorrow, what would happen to the house?  If you can't figure out the split today, when you are still together and you still like each other, the chances of coming to an agreement if the relationship sours are basically nil.  Or at least the chances of coming to an agreement you both feel good about.  Also, does his loan to you have interest?  If so, is he claiming it as income (and you, potentially, as a deduction, depending on the specifics)? 

[GilesMM]

The house was a joint property, which would be supported by common law in many jurisdictions.  When you sell, the mortgage gets paid off at closing from the proceeds.  The final settlement check (net proceeds after mortgage and all costs) should be put in a joint investment account or applied to pay down the mortgage, if any, on the current house.

[FireOnTheMuffin]

@Villanelle, well I am now on the title, so if we broke up, I'd still own half, though the loan would be outstanding.  I'd probs get short-changed a few $100k.  If the worst were to happen, I guess I'd have to accept that as the cost of having tried to keep options open for other real estate back then.

His loan to me has interest at the AFR, which was absurdly low in 2021.  Interest doesn't come due and payable until the loan terminates.  Current plan is to write off the interest as a gift, but it's only a few hundred dollars in total.

@GilesMM, we don't have common law marriage here, and aside from the mortgage, there's still the loan note between us to deal with.  We issued the note not because we wanted to have me owing him a bunch of money at a higher price than what he paid for the house.  But, just because we couldn't transfer me (a non-spouse) half the value of an appreciated house without triggering it as a huge gift otherwise.  I didn't want it to be considered a gift and using up part of his lifetime gift exclusion.  It is all admittedly sort of a mess.

[aloevera1]

Do both of you have written wills? If no, I think that's probably the most significant thing to consider.

If something happens to either of you, estate laws will kick in and... I am not sure what will happen as I am not a lawyer but you probably want to hire one. 

[Metalcat]

Do both of you have written wills? If no, I think that's probably the most significant thing to consider.

If something happens to either of you, estate laws will kick in and... I am not sure what will happen as I am not a lawyer but you probably want to hire one.

This is exactly why I said to consult a lawyer, because there are just so many elements where it's easy to think you've covered your bases, but you don't even necessarily know which bases should even be covered.

It's always what you *didn't* anticipate that bites you in the ass.

[GilesMM]

...

@GilesMM, we don't have common law marriage here, and aside from the mortgage, there's still the loan note between us to deal with.  We issued the note not because we wanted to have me owing him a bunch of money at a higher price than what he paid for the house.  But, just because we couldn't transfer me (a non-spouse) half the value of an appreciated house without triggering it as a huge gift otherwise.  I didn't want it to be considered a gift and using up part of his lifetime gift exclusion.  It is all admittedly sort of a mess.

You are joint owners, so no issue with gift. 

[spartana]

Do both of you have written wills? If no, I think that's probably the most significant thing to consider.

If something happens to either of you, estate laws will kick in and... I am not sure what will happen as I am not a lawyer but you probably want to hire one.

Y. This^^^. In Calif where the OP is from there are several ways to hold joint ownership whether married or not. The most common 2 are Joint Tenants with Rights of Survivorship (meaning you own equally 100% of the property and it passes to the co-owner if one dies) and Tenants in Common (meaning each co-owner only owns 50% of the property and upon death that co-owners share goes to their heirs and those heirs, or even the co-owners while alive, can sell their share to someone else). So there's a big difference in potential outcomes when it comes it how unmarried people (or even married people) hold joint title unless the other is listed as the heir.

For example you and a friend buy a house together. You do a Tenants in Common title and each of you own 50% of the property. Friend dies and their 50% share goes to their sibling who wants to move in with their 5 kids and 20 cats. Or wants you to buy them out. Or wants to sell or rent out their 50%. Since house can't be split they may get a court order forcing the sale of the property.