First comes love, then comes marriage, then comes a mortgage in the baby carriage! While we have traditionally heard that old ditty a different way over the years, traditions change and for many Millennials (ages 18-34) the family expansion has to wait. Not only does the baby have to wait, but for many Millennials, even marriage has to take a proverbial number. Many Millennials are holding off on marriage to save up for a down payment on residential real estate. A recent survey shows that 38 percent of American Millennials said that they would, or have, put off a wedding or honeymoon in order to afford to buy a home. This statistic isn’t very surprising considering that the average American wedding can cost around $30,000. This figure doesn’t even include the honeymoon.
Unfortunately, the decision to hold off marriage before getting a mortgage might be more complicated than the Millennials may have first thought. Take note, I wrote this article to inform, not admonish the reader. I want you to have all the information about making one of the largest investments you’ll probably ever make in your lifetime. Initially, it sounds like it makes more financial sense to put the mortgage ahead of the marriage, but if the relationship goes south between these unmarried Millennials, be sure that divorce is much easier than breaking up real estate encumbered by a mortgage held between two unmarried people. In other words, think before you ink.
Rather than go into the details of how incurring the debt makes financial sense before marriage, if you expect a return on your real estate investment, ensure that your relationship with this significant other can withstand the financial commitment. Here’s an interesting statistic, according to the CDCP, 27.4 percent of couples who co-habitate before marriage break up by the third year of living together. In other words, think before you ink.
UPDATE on 2/20/15:
On 2/19/15, we posted this article about the risks of investing with someone you are romantically involved with before getting married. On 2/20/15, less than a day after posting the article, our office was presented with a legal situation that clearly exposed the pitfalls associated with couples buying residential real estate before marriage. Below are the facts:
In 2012, Boyfriend and Girlfriend purchase a home. They finance the purchase and both are considered borrowers (read: jointly and severally liable for the debt). In other words, both are on the hook for the debt separately and as a couple. Boyfriend and Girlfriend break up and Girlfriend moves out. Boyfriend continues to make payments on the debt and some years later, Girlfriend transfers her interest. The transfer is made to Boyfriend without any money exchanging hands, via Quit Claim Deed, to Boyfriend. Minimum documentary stamp tax was paid upon recording, not documentary stamp tax based upon half the balance of the principal amount remaining on the mortgage, as would be required by the Department of Revenue. There was no refinance or change in liability on the debt.
Fast-forward to 2015, where the Department of Revenue does an audit of the transfer referenced above. The Department of Revenue questions the Boyfriend about the minimum documentary stamp tax and now wants him to pay taxes based on half the balance of the principal amount remaining on the mortgage. This figure requested by the Department of Revenue most probably includes penalties for not paying the correct documentary stamp tax upon transfer. Now, here is a real life situation that probably could have been avoided by being informed of the risks before taking on the mortgage. Technically, it is our opinion that the Department of Revenue is entitled to collect on the unpaid balance of documentary stamp tax, but however you look at it, there is a problem that needs to be addressed. Think before you ink.