SHOULD I HELP MY DAUGHTER BUY A HOME USING EQUITY SHARING?
TIPS FOR BUYERS, TIPS FOR SENIORS
August 9th, 2008
One method of purchasing real property that gained popularity in the recent housing boom is equity sharing. Basically, one party (the owner occupant) occupies the property and the other (the investor) puts up the bulk of the financing. Both can receive tax benefits from these legal and financial arrangements according to the terms of the equity sharing agreement. This is popular with some first-time homebuyers who occupy the home and a family member, seller or investor that provide the financial backing necessary to make the deal happen.
Equity sharing is a form of ownership and investment that allows two or more parties to share an interest in real estate. California, with its high cost of housing, is a prime location for this sort of arrangement. The investor usually puts up all or most of the downpayment, and the owner-occupant agrees to pay a monthly amount considered “rental payments” and lives in the dwelling. The rental payment may include the mortgage payment,property taxes and other specified charges including property insurance and HOA fees, if any. This monthly cost can be determined any way the parties agree to and will determine who gets which tax deductions. Because there are so many different ways to construct an equity sharing agreement, there are many potential pitfalls if the agreement is not drafted carefully.
The rent paid by the owner-occupant should be proportional to the percentage interest that the owner-occupant has in the property. Ideally, both the occupant and the investor are on the title and loan documents. Rent paid to the investor is taxable income, and interest paid on the loan is tax deductible. IRC Section 280A defines and addresses equity sharing arrangements. The code specifies the owner-occupant must pay fair market rent to the non-occupant investor. The written equity sharing agreement must cover both ownership issues and the lease agreement since one party is considered a tenant. The investor cannot live in the property. Both parties would be well-advised to have an attorney draft the agreement to insure it complies with the tax codes.
Retirement account funds can be used in an equity sharing arrangement under specific circumstances. A 1031 exchange can also be used to enter into or out of an equity sharing arrangement. It’s very important to have a real estate professional familiar with this investment method if you are considering an equity sharing arrangement. Contact me for further information on this or any real estate topic. I also offer free market evaluations and expert buyer representation. My contact information follows:
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER
REAL ESTATE PROFESSIONALS GMAC
25 YEARS LOCAL REAL ESTATE EXPERIENCE
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