In a typical transaction, the equity in the property is modified so that much of it is a note payable to the Investor. The remaining equity after the note creation and bank debt is approximately10% of the value of the property. The Covestor purchases not more than 49% to participate in future equity growth.
The Investors greatest benefit is owning a property with a co-owner who is a minority investor that cares for and often improves the property and pays its expenses. No more tenant hassles, turnover, maintenance concerns or paying holding expenses. The heart of the Covestor follows the money as the Covestor realizes the extraordinary opportunity.
Yes. In fact, equity sharing is well suited to Investor groups who seek a mid-risk potentially high return investment strategy. Many Investors decide to own their investment properties in an LLC to shield their personal assets from liability.
Yes, as long as you do it through a self-directed retirement account custodian.
Yes. Because you will retain an investment in your property. Sellers think of this as the best of both worlds. In a buyer’s market, the seller who equity shares gains a market of his own. In this new market where loans are nearly impossible to come by, the seller’s best way to get out from under is to refinance or just keep the existing loan and offer the Covestor a note for some of the equity.
Yes. A seller confronted with capital gains exceeding his basis can solve his tax problem by an equity share sale. This reduces his tax basis so it conforms to a tax-free sale (return of capital).
It depends. Ownership and sharing of appreciation are not necessarily the same. This factor is considered when setting the co-owners’ ownership interests. However, at no time does the Covestor interest exceed 49%
If a capital improvement is desired (i.e., a room addition), the Covestor must make it and pay for it. The written consent of the Investor is required. For necessary repairs not covered by insurance (a new driveway), typically the costs are shared.
Yes, before the property’s appreciation is split, capital contributions such as down payment and improvement contributions are returned. You will have agreed to any improvement and its cost in advance.
Yes, examples are available elsewhere on this site or may be requested with specifics provided.
This is a bargaining point for the Investor and Covestor. Typically, the Parties may elect merely to share the appreciation on some basis mutually agreeable.
Investors get tax benefits as to their interest – e.g. depreciation and tax free exchange possibility. The Covestor gets 100% of the interest paid on loans and property taxes, assessments, etc.
Yes, the mixed tax treatment in the traditional equity share format is permitted by the IRS. Internal Revenue Code §280A. This allows the Covestor to claim his interest in the property as his principal residence while the Investor claims his as his investment property.
Since the Covestor lives in the entire property but only owns part, the IRS requires the Covestor to pay rent to the Investor without specificity as to the amount (Fair Market Rent) and allows non-specific offsets to the rent. The Covestor pays a small portion of the expenses earmarked as rent into an Investor Account. Then he pays an equal amount of property expenses out of this Investor Account. The net result is you have some rental income offset by deductible property expenses. This enables the Investor to claim the property as investment property and receive investment property tax treatment.
Not much longer than seven years. The Investor has enjoyed stability and the Covestor has built equity that allows him to move on the outright ownership. At Conclusion, the Parties may elect to extend the agreement. Big returns without hassles.
Yes, per the Agreement, all co-owners are in the investment for the term of the agreement. But, there is the possibility of liquidity as described in the Agreement.
Yes, with the consent of all parties.
Yes, but if a situation arises where the Covestor cannot continue living there, the Equity Sharing Agreement allows it to be rented with the Investor’s consent. However, the Covestor remains liable for the interest.
They are shared as per the Agreement and not reimbursed.
Yes, the Occupant Investor receives exclusive occupancy of the property and pays all its expenses.
The Covestor is not required to qualify for the existing bank loan nor for the Investor created Note because the Covestor is added to title.
Loan Payments, Taxes, HOA fees, Insurance and Assessments are processed by an independent loan servicing company paid for by the Covestor. Any delinquency is reported immediately as the Covestor’s continuing ownership is contingent upon faithful performance of the obligations under the Agreement.
Each agreement is unique as it is negotiated by the Parties to the transaction. However, an overview / guide is available upon request. Legal professionals provided by Covest assist in the creation of the Agreement.