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Brian Collins of our office was the source
for this article.
Helping Others
Buy a Home
Can Be Beneficial
By RAY A. SMITH
Staff Reporter of THE WALL STREET JOURNAL
Share the wealth.
Through shared-equity agreements, individual real-estate investors
can do just that to help a family member or friend buy a home --
and reap some profit and tax benefits in the process.
Some accountants and financial advisers are recommending that
their clients, especially those with adult children, consider these
investment vehicles as home prices have skyrocketed.
The pacts are co-ownership agreements between two parties, an investor-owner
and an occupier-owner. The investor-owner puts up cash for either
some or all of the down payment for a house that a family member
or friend wants to buy. Once the property is purchased, both parties
have an ownership interest in the property.
The family member or friend becomes the property's occupier-owner.
For tax reasons, under the Internal Revenue Code (Section 280A),
the investor-owner must charge the occupier-owner fair rent for
the right to occupy the property if he or she wants to take any
tax deductions related to the property. The investor-owner can then
use that rent to cover the expenses, including mortgage payments,
homeowners insurance, and property taxes.
"I almost always recommend that the investor-owner charge rents
so [he or she] can maximize tax benefits," says Brian Collins,
an attorney in Ross, Calif.
The agreement has a finite life, often varying from three to 10
years, after which the occupier-owner can buy the investor-owner
out or vice versa; the property can be sold with the proceeds being
divided between the parties; or the term can be extended.
These agreements can be advantageous for both parties. For instance,
if the property is sold at the end of the deal's term, the investor-owner
gets back the original down payment plus a share of the proceeds
from the sale. Also, the investor-owner can get a tax write-off
on expenses and could receive tax deductions for depreciation.
Owner-occupiers can benefit by deducting mortgage-interest payments
and property taxes on their income-tax returns. What's more, if
and when the property is sold, they qualify for exemption from capital
gains -- as much as $250,000 for individuals and $500,000 for couples,
as long as they lived in the property for at least two out of the
previous five years.
There are some risks, though. For one, the occupier-owner might
fall behind in payments and even default on the mortgage, which
could force the investor-owner to foreclose on the property -- a
lengthy and costly process. The investor-owner would have to pay
out of pocket for the foreclosure process.
In some cases, there's also the possibility of the property depreciating
so the investor-owner either would get less or just the down payment
back. In addition, the occupier-owner also could neglect upkeep
of the property, which means it wouldn't be attractive to a buyer
when the agreement ends.
Sandra West, a Frederick, Md.-based certified public accountant,
points out that it's important for investors to consult with a real-estate
attorney familiar with the jurisdiction in which they're investing.
"Each state has different rules regarding real-estate titling,"
she says. The names of all participants in the agreements must be
on the property title.
Write to Ray A. Smith at ray.smith@wsj.com
AGREEING TO SHARE
Shared-equity financing agreements can be used to create a tax benefit
for a parent or other person helping an adult child or other loved
one to purchase a residence. Here is how such an arrangement can
be structured.
The arrangement provides that the investor:
o Furnishes the down payment of 20% toward the purchase price
of the home
o At the end of five years, the home is sold and the investor receives
back the original down payment plus/minus 50% of the profit/loss
on the home (which is treated as long-term capital gain/loss)
o Is not a co-signor on the mortgage but may take over the home
and mortgage if the buyer defaults
o Is subject to the risk of loss if the property sells for less
than the purchase price, but is not liable for any losses in excess
of the original down payment
The arrangement provides that the buyer:
o Selects the home and must qualify for the mortgage
o Pays the mortgage and gets tax deduction on interest
o Is responsible for all repairs and maintenance
o Must sell the home when any "triggering event" occurs
such as change in marital status, the ceasing of the use of the
home as the principal residence, or insolvency. In general, must
sell at the end of five years, unless there is agreement to buy
out the investor based on qualified appraisals
o Keeps half of the profit on the home when sold
San
Jose Mercury News
SATURDAY, MAY 11, 2002
The
San Jose Mercury News serves the heart of the Silicon Valley.
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Real Estate
Cover Story.
It's a win-win. The only
loser is the IRS, and don't you just love that?
EQUITY SHARING PUTS PEOPLE INTO HOUSES WHILE
GIVING INVESTORS A CHANCE FOR PROFITS
By Julie Clairmont
Special to the Mercury News
The down payment, for some, is a seemingly
insurmountable brick wall between them and the American Dream
of owning their own home.
This is especially true in expensive California real estate
markets like Santa Clara County, where the median price of
a single-family home hovers around $475,000, meaning a home
buyer would need $95,000 for a 20 percent down payment.
The ironic thing, says Larkspur attorney and real estate broker
Marilyn Sullivan, is that it doesn't have to be like that.
Sullivan is a nationally recognized expert on equity sharing,
an arrangement in which investors supply the down payment
and the buyer-occupant lives in the house and pays the mortgage.
At the end of a specified term -- Sullivan recommends seven
years -- the home is sold. The investors and occupant split
the equity, usually 50-50, and go their separate ways. The
sale could be to a third party, or the occupant could refinance
the property and buy out the investor.
``The goal is for the occupant to have a tax deduction, realize
some appreciation and, when it's over, be able to get rid
of the investor,'' says Sullivan, author of a book on the
subject, ``The New Home Buying Strategy.''
If the investor and occupant choose a property that is a solid
investment, both parties benefit, says Sullivan. The occupant
becomes a homeowner without a down payment, and the investor
makes a return on their investment. On top of that, both parties
receive tax benefits from owning the home.
Darren Story, a San Francisco options broker, and his brother,
Eric Story, a Safeway manager, used equity sharing recently
to buy a $680,000 home in the Crocker-Amazon area of San Francisco,
near the Cow Palace. Their father, Stephen Story of Catalina
Island, was the investor, coming up with 15 percent of the
20 percent down payment for the mortgage loan.
Problems typical
Darren, 30, and Eric Story, 25, are typical of many Bay Area
residents: well-paid with good jobs and strong credit, but
finding it difficult to come up with the large down payment
needed to purchase a home here.
Equity sharing ``is a great opportunity for both parties,''
says Darren Story. ``It was a good way for my dad, who was
pretty hard-hit in the stock market, to balance out the risk
in his portfolio and, at the same time, help his kids out.''
There are different ways to structure an equity sharing deal,
and the tax benefits depend on the agreement. Using Sullivan's
formula, the investor would use rent paid by the occupant
to pay for homeowners insurance and homeowners dues (if any)
-- both of which are tax-deductible for the investor.
The investor and occupant both get to deduct the property
taxes; if the ownership agreement is 50-50, they would each
get to deduct half. The occupant also gets to deduct the mortgage
interest. The investor can also depreciate their share of
the rental property.
``It's a win-win,'' says Sullivan. ``The only loser is the
IRS, and don't you just love that?''
How it works
Using a $400,000 home as an example, Sullivan explains how
one equity sharing model works:
An investor or investors supplies an $80,000 down payment
-- 20 percent -- and the occupant pays the $2,000 mortgage
payment each month plus rent to the investor.
The two parties agree to a 50-50
split in ownership and take title as tenants in common.
Assuming 10 percent annual appreciation, the house
would be worth $779,000 after seven years. Assuming a loan
balance of $295,000, equity in the home would equal $484,000.
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The house is sold, the investor gets
the $80,000 down payment back, and the occupant receives the
$25,000 in mortgage principal they have paid. That leaves
$379,000 for the parties to split, without taking into account
realty agent commissions or other sales costs.
Additionally, the occupant-buyer has
been deducting mortgage interest over the seven years, and
both the occupant and investor have been deducting a portion
of the property taxes.
The investor could reinvest their share of the proceeds
in another rental property through a tax-deferred exchange,
she says.
In Sullivan's example, the title is held as ``tenants in common,''
but title can also be held in joint tenancy with the right
of survivorship, partnership, or a living trust. However,
all parties must hold title.
If the property has not appreciated during the term of the
contract, the parties could agree to an extension. Some contracts
have a clause that provides for automatic extension if the
property has not gained in value.
Low risk
Ken Gervais, owner of Triangle Realty in San Jose, says there
are few risks to equity sharing, if it is done thoughtfully.
``Anytime you have a someone buying something with very little
money invested, you run a higher risk that they will default,''
says Gervais, who has been in business for 10 years.
``But that's why we look for occupants with excellent credit.''
For the occupant, the time factor may be a problem, says Gervais,
who recommends a five-year equity sharing term. Through his
program, occupants can rent out the home if they need to.
In most cases he has seen, buyers have opted not to purchase
the home at the end of the contract. ``After five years most
people are ready to move on,'' he says.
Triangle Realty matches occupants and investors for equity
sharing and also will help would-be occupants find a house.
Gervais says making offers on homes using equity sharing financing,
even in a seller's market, is not difficult. The trick, he
says, is for the occupant to get all of their financing in
place before they make an offer.
The biggest challenge of equity sharing may be finding an
investor or investors. Amy and Todd Mezullo of Sebastopol,
for example, feel they would be ideal occupants in an equity
sharing arrangement. ``We've got good credit and income, we're
upwardly mobile, we've been paying rent on our town home for
the past eight years,'' says Amy Mezullo.
The Mezullos, who would like to buy a home in Santa Rosa,
closer to Todd Mezullo's job, are hoping to find an investor
who will see them as a good risk. The couple has posted their
names on a bulletin board on Sullivan's Web site hoping to
hook up with an investor.
While Sullivan has overseen about 1,000 equity-sharing deals
over 17 years, she says it's a home-buying tool that is most
used within families, specifically for parents helping children.
Sullivan suggests home buyers interested in equity sharing
consider approaching family members and friends and asking
them to invest $2,000 or $3,000 each until there is enough
money for the down payment. She also recommends they learn
how to explain the benefits of the investment, particularly
the possible appreciation benefits of investing in California
real estate.
Would-be home buyers interested in equity sharing might also
try contacting realty agents, accountants, attorneys and other
professionals who might know an investor.
While equity sharing can be mutually beneficial for investors
and occupants, financial experts recommend using a real estate
attorney who understands equity sharing agreements. Do not
attempt to draft the contract yourself, they say.
Some tax professionals recommend against equity sharing agreements
with strangers, saying this tool works best for parents who
want to help their children get into a home.
EQUITY SHARING
For more information about equity sharing in buying homes:
Marilyn Sullivan offers a free seminar on equity sharing
on the first Tuesday of every month, 6 to 7 p.m. at Bank of
America, 1000 Fourth St., San Rafael. Reservations by calling
(415) 461-1444 or going on the Web at www.msullivan.com
Sullivan has written a book on the subject, ``The New
Home Buying Strategy,'' that is available at Amazon.com. ($24.95,
McGraw Hill). |
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San
Francisco Chronicle
SUNDAY, JULY 29, 2001
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Equity sharing
can benefit investors, first-time buyers
Judy Richter - Real
Money
It's no secret that buying your first house
in the Bay Area is difficult.
Even if you have a good income and can make hefty mortgage
payments, it's hard to save a 10 or 20 percent down payment
when starter houses are going for $400,000 or more.
One way around this quandary is an investor-occupant arrangement
called equity sharing. In such an arrangement, the investor
supplies the down payment but doesn't live in the house.
The occupant lives in the house, pays the mortgage and agrees
to give the investor an ownership interest - usually 50 percent
- in the house.
To satisfy Internal Revenue Service requirements, the occupant
also pays the investor rent in proportion to the investor's
ownership share, said Marilyn Sullivan, a Larkspur attorney
who specializes in equity sharing contracts.
In turn, the investor claims his share as rental property
and is entitle to the tax benefits that go with it.
Sullivan cited a theoretical $00,000 house for which the investor
supplies the $80,000 down payment and the occupant pays the
$2,00 monthly mortgage payment. They agree to a 50-50 split
in ownership and take title as tenants in common.
Using formulas and software that she has developed, Sullivan
said the occupant would pay the investor $640 a month in rent.
The investor uses that rent to pay expenses in this order:
homeowner insurance, which is tax-deductible for him but not
for the occupant; homeowner dues, if any, which also are tax-deductible
for him but not for the occupant; and whatever is left for
property taxes, which are deductible for both parties.
The investor also can depreciate his share of the house as
rental property.
"In the long run, the occupant loses 1- to 15 percent
of the deductions" that he would get if he owned the
house alone, Sullivan said.
However, the investor has used the rent to pay expenses that
the occupant would ordinarily pay, and the occupant still
gets tax deductions that he wouldn't have had as a renter.
The arrangement usually continues for a set number of years,
after which either party has the right to buy out the other.
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If neither one
wants it and they decide to sell the house, they split the
proceeds.
Again citing that $400,000 house, Sullivan assumed that it
appreciated 10 percent a year and sold for $779,000 after
seven years.
She also assumed that the loan balance is $295,000, leaving
and equity of $484,000. From that amount the investor is entitled
to his $80,000 down payment. The occupant is entitled to the
$25,000 in mortgage principal he paid over the years, leaving
$379,000 for them so split equally. That's $189,000 each before
the sales costs are paid.
Besides walking away with that cash, the occupant has deducted
a total of $169,000 in mortgage interest over the seven years.
The investor has received $30,800 in rent but has applied
it to other costs, which he has deducted.
Furthermore, because his share was rental
property, the investor can reinvest in another rental property
-
called a tax-deferred exchange - and not pay taxes on his
share of the sales proceeds, Sullivan said.
Equity sharing can be an excellent real estate investment
because the occupant has an ownership stake and a strong incentive
to make the payments and maintain the property. Even if one
part reneges on the deal, the other can foreclose.
Sellers confronted with a slow market might offer to do an
equity-sharing arrangement to help sell their houses.
Many parents see equity sharing as a good way to help their
children buy a house. Moreover, they can gift a portion of
their investment to the child or children each year. "It's
a good estate reduction tool," Sullivan said.
However, equity sharing also can be done by strangers. Some
people put ads in the paper looking for investors or occupants.
One of the most important factors in equity sharing is to
choose a house that has a good chance
of appreciating, Sullivan said.
It's also important to remember that this is a business deal
even when family members are involved. Therefore, it's crucial
to have a written contract that spells out all aspects of
the finances as well as contingencies such as death, bankruptcy
or liens.
Sullivan has written two books about equity sharing: "The
Complete Guide to Equity Sharing" and "The New Home
Buying Strategy."
She also teaches a free seminar about equity sharing the first
Tuesday of every month from 6 to 7 p.m. at the Bank of America,
1000 Fourth Street, San Rafael. Reservations may be made at
415-461-2311 or www.msullivan.com.
_______________________________
E-mail Judy Richter at
jrichter@sfchronicle.com |
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