Home Equity Sharing Benefits Owner, Renter : Taxes: Advantages of buying a home with others give non-resident co-owners flexibility as investors.

Do you want to own a home and have good income, but you don’t have a down payment? Or, do you have money to invest in real estate but you don’t want to be concerned about managing property?

The solution to both problems is called residence “equity sharing.” This arrangement, authorized by Internal Revenue Code 280A, allows a non-resident co-owner-investor to make the down payment, and the resident co-owner to pay the expenses and maintain the property.

All the co-owners can deduct their appropriate income tax deductions, thus saving on their taxes.

In a customary equity sharing arrangement, the resident co-owner pays the mortgage payment, property taxes and repair costs.

The non-resident co-owner typically makes the down payment but usually does not pay any of the expenses and repair costs, except for extraordinary expenses such as a roof replacement.

The resident must pay to rent the non-resident’s share of the home. This monthly rent is usually the same amount as the non-resident’s portion of the monthly mortgage, property tax and insurance payments.

The resident is entitled to itemized tax deductions for the resident’s portion of the property taxes and mortgage interest paid, but not for the rent paid to the non-resident co-owner.

The ownership split can be whatever percentage the co-owners decide, such as 50-50, 25-75 or 33-67.

But IRC 280A says all co-owners must hold title to the property if they are to claim income tax deductions for the residence.

Joint tenancy, tenancy in common, partnership or living ( inter vivos ) trust ownership methods are allowed. But a lease-option cannot be used, since all co-owners must hold title to the property.

The non-resident co-owner must report the rental income received from the resident co-owner on Schedule E of IRS form 1040.

But the non-resident will have deductions for his share of the mortgage interest, property taxes, insurance and other expenses paid. In addition, the non-resident can depreciate his share of the home that is rented to the resident co-owner. Straight-line 27 1/2 year depreciation is currently allowed. The result will probably be a paper loss that can shelter up to $25,000 of the investor’s ordinary income, such as wages, interest and dividends from income tax.

The benefits for the resident co-owner include acquiring a home with no initial down payment, receiving income tax deductions for part of the mortgage interest and property tax payments, and eventually receiving full ownership of the home.

Benefits for the non-resident investor include owning part of a residence that will probably appreciate in value, helping the resident eventually own the home, being entitled to tax benefits, such as the depreciation deduction and part of the mortgage interest, property tax and insurance payments, and not having any management and maintenance worry.

The biggest potential equity sharing problem occurs if the resident doesn’t make his monthly payments. Getting rid of a non-paying co-owner is not easy. Foreclosure doesn’t work because you can’t foreclose on a co-owner. Neither is eviction the solution because the evicted resident would still be a co-owner. If one of the co-owners becomes bankrupt, creditors can attack that co-owner’s property share.

A possible solution to the problem of a non-paying resident is a quiet title lawsuit. Another is a partition lawsuit. But the resident might persuade a sympathetic judge that the non-resident must buy out the resident’s equity to gain title to the entire property.

Because of the potential equity sharing problems between investors and residents, the ideal equity sharing situation is between parents and their adult children.

Since everyone has known each other at least 20 years, the chances of major problems are minimized. However, trouble can develop if the resident adult offspring is married and a divorce occurs. But this potential problem can be covered in the equity sharing contract.

There are no standard equity sharing agreements. But IRC 280A requires a written contract between co-owners.

A real estate attorney can prepare an equity sharing agreement to include provisions for title ownership by all parties, names of all co-owners and their percentage share of ownership, a buy-out arrangement so either co-owner can buy out the other, provision for profit split within five to 10 years upon resale or refinancing of the residence, arbitration of any dispute, payment for capital improvements desired by the resident co-owner, provision for payment of extraordinary costs over $500, such as a roof replacement, and a rental contract for the resident to rent the non-resident co-owner’s share of the home.

Further ideas on equity sharing, including sample agreements, are available in the book “Equity Sharing” by Georgia Anderson and Sandra Lamb (Contemporary Books, Chicago, 1986, $6.95), available in stock or by special order at local bookstores.