Thinking about co-buying your home? Before buying a home with another family member, consider problems that can occur.
Q: My husband, sister, and I are buying a home. My sister would like to pay one-third of the cost of the house and we’d finance the rest of the purchase. My husband and I would pay the mortgage each month, but my sister would not contribute to any of those payments. Is there a problem with my sister putting up the money? Does the government care that she puts that money in without being on the debt or does it matter?
A: The real question for you to answer is why do you want to own the home with your sister? If the home will be lived in by you and your husband, you might not want to have your sister in the mix. However, if all of you will purchase the property together and your sister will live there with you, you will all have an interest in owning and living in the home.
There are cases where certain family members help others with the purchase of a home. Your sister may be putting up the down payment of the home so that you and your husband can buy the home. That’s a noble gesture on your sister’s part to help you out.
However, we’d like to see the three of your have a written agreement to decide who owns what, how the home will be run, who will decide when to sell, who will decide what needs to be fixed and how, and any other major decisions relating to owning the home. The document needs to be similar to a partnership agreement so that any issues can be easily resolved between the three of you and you’ve thought through the many issues that can and will come up. The agreement should also spell out financial terms, including the fact that your sister is paying the down payment and you are paying the monthly costs for the property.
Once you’ve agreed on how you will own the home and have agreed on the major decision making terms, you can proceed to the closing table.
The federal government won’t care whether one or all of you are on the loan for the property. It will care that you account for all tax payments and issues properly. If you can deduct real estate tax payments or interest payments, the proper party should take those deductions on his or her federal income tax return.
When the home is sold, the person receiving a profit or loss from the sale must account properly for that profit or loss. Those are the issues that would most concern the federal government.
As you decide to move forward in this purchase, you should talk to a real estate attorney about the purchase and what you’re hoping to achieve by designing the purchase in this way. The attorney will draw up the documents you will need, including what is basically a partnership between the three of you. You might also want to talk to an accountant to make sure you understand the implications of owning the home this way. The accountant may be more for the benefit of the sister (If she won’t live in the property) than for you and your husband.
Also, while we might focus on your relationship with your sister, you sister should also consider your relationship with your husband. If you and your husband don’t get along and split up, you and she will need a mechanism to buy him out of his interest in the home. You also need to discuss what happens if one of you dies. Will the other two inherit that share of the property equally? If your sister dies, will you and your husband inherit her share or will she leave it to her children or other heir? How you hold title to the property and what the partnership agreement says will be extremely important on this issue.
For these reasons, and many more we’ve explored in this column over the years, your first step is to find a good real estate attorney who can help you turn this plan into reality, while preserving your family relationships.