A growing trend with younger generations is friends buying a house together. It’s easier to buy a home if someone else is sharing the cost, but there are legal and financial realities all parties must understand and accept. Here’s what you need to know if you’re thinking of buying a house with a friend.
Millennials face home buying challenges
Buying a home with a person other than a spouse is not an entirely new trend, but it has become more popular with millennials who are postponing marriage and facing big college loan debt and soaring home prices. The National Association of Realtors reports that the percentage of buyers who were married couples has declined to 60 percent from a high of 81 percent in 1985. The percentage of buyers who are single women has risen to 19 percent.
Issues to consider
Before buying a house with a friend, consider the following important issues.
- How will each of you be named on the deed? Non-married couples can co-own property in two ways. Joint tenancy means that if one owner dies, his or her share of the home’s equity will transfer to the surviving co-owner(s). With tenancy in common, each owner designates in a will the person who will inherit their share of the house. This will bring a new owner into the arrangement.
- How will you divide the purchase price, equity and any mortgage payment? How will you share costs such as property taxes, insurance, maintenance and repairs? Determining which proportion of the home each person will own is essential to answering these questions.
- Will the friends apply for a mortgage jointly? If so, what will happen if one person can no longer afford their share?
- How will the home mortgage interest deduction be handled? When filing federal income taxes, each homeowner may deduct an amount equal to the percentage of the property taxes and mortgage interest he or she pays, provided his or her total deductions are high enough to itemize on a tax return. Splitting the mortgage interest deduction unfortunately could cause one or more of the owners not to reach the threshold for itemizing deductions. Consult a tax preparation professional to see whether it’s best for the owner with the highest income to claim the full deduction and then settle up with the co-owner(s).
- What will you do legally and financially if one of you chooses to exit the arrangement?
Once you and your co-buyers have decided how to address these issues, your agreement should be set out in writing. Bringing in an attorney can help ensure problems won’t arise later.