February 24, 2004 -- Want to assist your kids in buying their first home and do it in such a way that everyone benefits? Should you lend them the down payment? Should you co-sign the loan? Is there a way that is more tax friendly? A shared equity arrangement can help. The following is one scenario that works.

Your daughter and her husband (Flo and Joe) have found the perfect home, are ready to sign, but mortgage qualification is slightly out of reach. You (Mom and Dad) can put up the down payment and sign on the mortgage note for a 50% undivided interest in the property. Flo and Joe sign the mortgage note as well, and own the other 50% undivided interest. Flo and Joe live in the house and pay you an agreed-upon rent for your 50% interest in the property. Fair market value rent must be charged. This amount is based upon the facts; case law indicates you may be able to set rent at 80% or more of full market rents depending upon the circumstances. The reasonable rent helps Flo and Joe get started, and lowers your taxable rental income. You treat your 50% interest as rental real estate, and your expenses incurred as the landlord including depreciation qualify as deductions against rental income. Flexibility in allocating tax benefits is available because you all are on the title of the property and the mortgage note. Deductions do not have to be divided 50/50; whoever pays the expenses gets the deduction. This allows for significant tax planning to maximize home ownership deductions and minimize or eliminate net rental income.

Several years later Flo and Joe have outgrown their home and are ready to move up.  When the property sells, you sell your half as rental property, and Flo and Joe treat their portion as their primary residence, qualifying the sale under the gain exclusion rules for such homes. Your portion also qualifies as a real property interest, allowing for favorable capital gain treatment, as well as the powerful like-kind exchange tax deferral rules.

Flexibility in the ownership percentages and appreciation sharing arrangements, as well as the use of financing structures, are possible alternatives to the above example that can be used to suit your financial, income tax and estate planning needs. 

There’s much more to this powerful financial tool.  Call the Real Estate Advisory Services Group at Asher & Company, Ltd. today to learn more about how a shared equity arrangement can work for you.

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