Cohabitation Agreement

[SuperDad300]

Hello,

I am hoping someone can give us guidance. One of us has zero assets or liabilities, the other party has significant assets. We want to get a cohab agreement and trying to fiugure out the best way to be fair to both of us. I have kids from a previous marriage that I pay child support on. If I have the means to buy a house outright. What is the best way to approach this. Is it better we carry a full mortgage or do I put equity into the home we plan to buy? I am looking for a fair way too obviously not hurt my girlfriend shall something go wrong and at the same time make sure I am fully protected if something does go wrong.

Thank You In Advance

[HammerDad]

I would speak to a lawyer on this to ensure you are covering off the basics. Cohab's can be quite exhaustive or be very simple, depending on the nature of relationship with each party.

There are other factors relating to division of assets in a common law relationship which many don't know. I recommend speaking to a lawyer. A couple grand now may save your $100k plus later.

[KanataKathy]

If you buy a house, make sure you are tenants-in-common, and not co-owners. If you're putting all the capital into the house, have yourself listed as the tenant-in-common with a 99% share, her with a 1% share.

That way, if you were to pass on, you can assign your 99% share to whomever you choose in your will (ie your kids). If you are listed as co-owners, upon your passing, your share goes to the other co-owner.

You should do this as a minimum precaution. A cohab is an even better idea, even if it's something that the two of you write up and sign. Don't wait until you move into the house - it may be too late...

.k

[SuperDad300]

Cohab Agreement

Thanks for the replies.

Does this sound fair for both parties (summary of assets in first thread).

I put approx 20% down and I own the home. She pays approx $900-1k for living expenses and I am responsible for the mortgage. I would own the home outright.

Is this fair to both parties?

[HammerDad]

I put approx 20% down and I own the home. She pays approx $900-1k for living expenses and I am responsible for the mortgage. I would own the home outright.

Is this fair to both parties?

I would either work out a tenancy agreement or a co-hab, just to be safe. You can write it out yourself or just make points about what you want and then take it to a lawyer to write out. It will save you a bunch of money if anything should decide to hit the fan.

[dinkyface]

Other things to put into the agreement
- Do you pay full costs when the house needs a new roof or other major reno?
- what does her rent include: phone/internet/cable? heat/electicity/water/waste collection? property taxes? security system monitoring? Home insurance? Equipment/materials for routine home maintenance? (ladder, shovel, salt, grass seed)
- are you charging a fair market rent (has tax consequences to both of you) or a lower amount that reflects your actual shared living costs (not taxable)
- provisions for increasing the amount e.g. possibly using the rental increase guideline amounts, or define a formula on how it is calculated based on your actual costs

For all of the above is pretty easy to determine what is fair...except for one thing: Assuming you determine the rent amount such that you are splitting costs equally, but you pay for repairs, then your partner is getting a bit of an advantage - she is completely sheltered from the risks of home ownership (i.e. uncontrollable major costs) without having to pay any premium for it.

[lumpy]

For all of the above is pretty easy to determine what is fair...except for one thing: Assuming you determine the rent amount such that you are splitting costs equally, but you pay for repairs, then your partner is getting a bit of an advantage - she is completely sheltered from the risks of home ownership (i.e. uncontrollable major costs) without having to pay any premium for it.

Wouldn't that offset the fact that if things end between them, the "rent paying" partner walks away with nothing and the the "home owner" keeps the home?

Example: What happens if they want to put in new flooring - is the renting partner responsible for part of that cost because they get to enjoy it? Or would renovations be the home owner's monetary responsibility because it directly affects the house value? Hard to say, it is a controllable cost. Furnace quits in the dead of winter - In that case the landlord is definately responsible for uncontrollable major costs.

Just my opinion ... You would have to set it up as strict landlord/tenant rules otherwise if there is a breakup the rent paying partner could try to have some kind of claim on the extra expenses that they contributed.

[dadtotheend]

This is not the place to ask whether it's fair. You can't expect a good answer with a couple of paragraphs of explanation.

But one example, what if you two are together for 25 years and then something goes south and you split up? Is it fair that she gets nothing after contributing to the home after all that time?

There are many other possible scenarios to consider. Every situation is different.

You are well advised to seek out a half hour consultation with a few different family law lawyers and find one you like.

As mentioned above, a couple of grand now will very possibily save tens or even hundreds of '000s later.

All that said, your proactiveness in this is a very good step. See it through.

[dinkyface]

Wouldn't that offset the fact that if things end between them, the "rent paying" partner walks away with nothing and the the "home owner" keeps the home?

If the 'rent' is set appropriately, then this is entirely fair - i.e. the homeowner is not profiting off their partner. It's only when the contribution is higher (i.e. higher rent, and/or paying some share of reno/maint costs) that it starts to be a possible argument.

Keep in mind another overlooked cost of home ownership...the loss of opportunity to invest the equity in some alternative investment.

[SuperDad300]

Cohabitation Agreement

Well thanks for everyone's input.

So if I understand correctly if the word rent is used-this has to be claimed. If it's living expenses then it does not right?

I assume in the scenario discussed if I am the homeowner I am also responsible for property tax on top of home reno's/improvements correct?

[lumpy]

If you do the strict rent thing then you should have a look at the landlord tenant act;

Landlord Tenant Board FAQ

You will have to claim this as income on your taxes, however, keep all reciepts for reno's, etc... as they are write offs (as is the interest on your mortgage). You might want to talk to an accountant, as the added income may bump you up a tax bracket. And it also would up your CS. Wierd eh!

[dinkyface]

Well thanks for everyone's input.

So if I understand correctly if the word rent is used-this has to be claimed. If it's living expenses then it does not right?

I assume in the scenario discussed if I am the homeowner I am also responsible for property tax on top of home reno's/improvements correct?

Using one word vs another is useless. You have to define everything, and back up your claim/position with some facts and figures.... in case CRA, or a wrathful EX, comes knocking

Add up all of the costs that you will have as a direct result of owning the house (mortgage interest (not capital), property tax, maintenance, lost opportunity cost of your invested equity) - and THAT is what you would split and call RENT. Everything else (utilities, phone/cable/internet, salt/cleaning supplies/etc) you would just split as the bills arrive - just as if you were both renting an apartment. Home insurance, hmmm, I'd think you would pay most of that, but since this is also protecting her THINGS, she should contribute a part, so handle that separately.
No need to pay taxes when you're setting it up like this.

[dinkyface]

Here's an example...
4000 Opp cost on 100k downpayment i.e. 4% after-tax return on $100k
20000 5% interest on 400k mortgage
3000 property tax
200 basic maintenance
27200 total yearly home ownership cost
1133 per person per month share (=total/24)
15 her monthly share of home insurance
1148 'rent' based on shared costs (utilities extra) - NOT taxable

I'd take that as a minimum, and I'd expect it should be significantly lower than 50% share of a fair market (utilities extra) rent.

Note that the figure would decrease to $982 (i.e. not a BIG difference) by the time you paid off your mortgage.

(Not sure if that helps, but indulge me, I like playing with these numbers)

[SuperDad300]

Cohab Agreement

Again, thanks for the detailed replies. Would this be simpler? I am not looking to profit nor lose if something were to go wrong. I put 20% downpayment and from there we split everything including mortgage and expenses. If this sounds fair if something went wrong what now? How could I structure this to make it fair? 60k on a 300k home today would be worth alot less say 5 years from now.....

[dadtotheend]

Talk to your GF about it. What do both of you think would be fair?

If you are contributing the DP but she will split the upkeep 50/50 with you it seems fair that if you split within x years that you get your DP back but that you share equally in the equity build up.

As time goes by (and I mean many years, say 10 or more) maybe you build something in to the agreement on a sliding scale whereby she gets to participate in the DP as well, reflecting the relatively greater importance of your mutual immersion into a lengthy relationship and the TLC that goes into the home you share together.

For example, you buy a $300K home today you put down $60K she puts down nothing. You agree to split all the costs 50/50 for operation of the home. Today you craft up a domestic contract that provides that you get your $60K DP back if you split but that the rest of the equity arising from increase in value of the home and paydown of the mortgage is split 50/50 if you break up.

Recognizing that longevity and the relatively greater importance of each partner's contribution to operating costs over time, you agree that after 10 years, the DP that you would get back if you break up decreases by $6,000/year, so that after 20 years everything is split equally.

I suggested a sliding scale in order to avoid the pitfall whereby if things go south close to year 10, that she hangs in there in order to get a full $60K one day after reaching the 10 year mark. That would be a disaster waiting to happen. The sliding scale also more appropriately recognizes a greater immersion of the DP into the relationship as time goes by.

I really like that idea. But again, talk to her. See what she thinks is fair.

The more you work out with her the better armed you will be when you take the deal to the lawyers (one for each of you) for ratification.

Again, you're being very proactive and you both should be congratulated for contemplating this ahead of time. Yes, it's an event that neither of you hope will ever happen. But if it does, the consequences down the road will almost certainly be worse than the awkwardness and expense of today.