My partner and I purchased a house together in DC. We each put the same amount down, but because of our salary differences, I pay 2/3 of the mortgage, and he pays 1/3. We have made a great deal of money on the house and intend to sell it in the near future. Am I correct in assuming that standard practice would be for us to get shares of the equity in line with our contribution percentages? Does anyone know if there are specific laws regarding this in DC? (Not sure if this matters, but despite my better judgment, he is on the deed, but not on the mortgage.)
IMHO, the word partner is relevant and changes the answer. If you had used the word friend instead, I feel that the most fair equity breakdown would be based on the contribution amounts. But in this case, the word partner implies that you are in this together, and if your income situations reversed at any point of time the contribution amounts would also have reversed without any questions asked. Or, if one of you lost your job and were unemployed for a while, perhaps together you would have tightened up on expenses and gotten through it. Therefore, I would consider fair in this case to be an equal 50/50 split. But obviously you both have to agree that's fair in order for it to actually be fair.
There is no "standard practice". The terms of ownership should have been put in writing when you bought the house.
Without anything in writing, the equity should be split in whatever manner you both can come to agreement on. Splitting based on total contribution would be fair in my opinion, but there's no law or anything that I am aware of that would enforce that split. If you can't come to agreement, it will have to go to civil court. As it stands now, you will not be able to sell or refinance the house without his approval (and vice-versa).
Not sure if this matters, but despite my better judgment, he is on the deed, but not on the mortgage.
Yes, it does matter. He has no legal responsibility to pay the mortgage. He could decide to stop paying his portion of the mortgage, and you'd either have to pay it all or let the bank foreclose and then be responsible for any remaining balance (which would wreck your credit but not his).
I would put together some sort of document (doesn't have to be fancy) that outlines how the mortgage payments should be split, and what happens when the house is sold. This is not an indicator of a lack of trust. All it is is an agreement on what should happen at that time just so you don't have to make that decision at closing time.
What is fair is hard to say without knowing all the details. If one person put in more cash but the other person did a lot more work on repairs and maintenance, presumably that "sweat equity" is worth something.
In a divorce, courts generally say that each party is entitled to half the value of any assets acquired during the marriage, regardless of how much cash each provided. In many marriages the man provides most of the income while the woman does a lot more work around the house. It's very difficult to determine the comparative value, but it's fair to suppose that if each didn't think they were getting as much as they were giving they would have sought a divorce sooner.
Of course it's possible that you put in more money AND you put in most of the work. I don't know.
You could certainly make a case that if you put in 2/3 of the investment, you should get 2/3 of the profit. See how he responds. If he accepts that, great. If not, use it as a negotiating point and go from there.
In addition to D Stanley's answer, I would like to mention how to calculate how much each of you have contributed.
your_contribution = (
total_equity-down_payment)*2/3 + (
your_partner's_contribution = (
total_equity-down_payment)/3 + (
You need to account for the equity of the down payment and not just a 1/3 v 2/3 split. For example, if you each put down 10% initially, then the shares should be 36.67% (10% + 1/3 of the remaining 80%) and 63.33% (10% + 2/3 of the remaining 80%), if you want to make it "fair."
The down payment % should be calculated (if you don't know the exact % already) using the initial purchase price, not the current market value.
On the assumption that normal household bills (insurance, housing taxes, electricity, etc.,) have been equally shared, as both of you probably used them equally, best bet is to take the down payment figures straight off the 'profit', and split the rest 1/3, 2/3. Obviously any selling fees would not be included in 'profit', and would come straight off the top. Or - would even that figure get the 1/3, 2/3 split...
I would calculate the exact dollar amount each has paid towards the house, take that amount as a percentage of what the total paid is, and that percentage is what each gets of the equity.
Example: you both bought a house for $500,000 (somewhat immaterial...) Person A put down $50,000 Person B put down $50,000
There were a total of 60 months paid into the house at $2000/month totalling $120,000.
So a total of $120,000 has been made in payments towards the house at the point of sale. A paid 2/3 of the $120,000 in payments, or $80,040; so B has paid $39,960.
Add back their $50,000 contributions to each of their payment amounts and you get a total for A of $130,040 and B of $89,860. This makes A's total percentage contributed 59.11% (130,040/220,000) and B's 40.89% (89,860/220,000).
Now they sell the house and make $100,000 in equity
A should get 59.1% of $100,000, or $59,110, and B would get 40.89 or $40,890.
That's assuming all other things being equal....
There are many different factors. Given that this situation is a mixture of business and personal, you're going to have to make judgment calls on which factors to consider.
If your partner hasn't incurred any risk regarding the house, then business-wise, he's not entitled to any of the gain; he's a debt partner, not an equity partner. So he's entitled to what he's paid, plus interest. What interest rate to use is complicated, but the simplest one to use is the mortgage interest rate. So for each of his payments (down payment and monthly), you'll have to multiply the payment by the interest factor calculated from the time elapsed from the payment. If this sounds complicated, don't worry, there are lots of online calculators that can handle it, or you can just use Excel.
Another issue brought up by @Grade 'Eh' Bacon is that if your partner is living in the house, then he can be considered to have incurred rent obligations. These could be larger than his monthly mortgage payments, so he could actually owe you money.
If you're confident that he would have covered the loss if the value of the house had declined, even though he was not legally obligated to due so, then there would an argument for considering him an equity partner. That will then raise several more questions about how to calculate his equity percentage. This will largely be based on the counterfactual "What percentage of the loss do you think he would have covered?" One way of addressing this would be to consider you to have bought 2/3 of the house. Then 1/6 of down payment was an "extra" payment by him (if he had bought 1/3 of the house, then he would be responsible for 1/3 of the down payment, so by paying 1/2, he paid 1/2-1/3=1/6 extra). So by this calculus, he is entitled to 1/3 of the profit from selling the house, plus 1/6 of the down payment plus interest. Another way would be consider his extra down payment as an equity contribution. In that case, the math is a bit more complicated to explain. Suppose B is the original purchase price, and you each put D down (for a total down payment of 2D). Then you each bought D/B of the house, leaving (B-2D)/B of the house left over. Of that remaining portion, you bought 2/3, and your partner bought 1/3. So your partner bought D/B+(B-2D)/3B = (3D+B-2D)/3B = (B+D)/3B of the house, while you bought (2B-D)/3B of the house. If the profit is P, then he is entitled to (B+D)P/3B. Then there are further variations if you think he would have covered half of the loss and want to consider him to have half the equity, or if you think he would have covered some other percentage.
Again, all of this has to be considered within the context of your relationship.
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protected by Chris W. Rea Dec 11 '17 at 21:44
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