In a typical transaction, 20% of the property value is equity and the loan is 80%. The Occupant Investor Occupant Investor buys a portion of the equity from the Investor / Landlord – typically less than 50% and achieves some percentage of ownership of the equity . The Occupant Investor portion may be “staged” over time if approved by the Investor.
The Investors greatest benefit is owning a property with a co-owner who cares for and often improves the property and pays its expenses. No more tenant hassles, maintenance concerns or paying holding expenses. A comparison could be made of a Company owner purchasing a building in his name with the Company as the tenant responsible for the occupancy, maintenance, etc.
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 Occupant Investor an All-Inclusive Note and Mortgage/Deed of Trust.
Yes. A seller confronted with capital gains exceeding his principal residence exclusion or basis can solve his tax problem by an equity share sale. This reduces his sale price ( sell 50% or less) and his tax basis so it conforms to a tax-free sale (return of capital). He converts the rest of the property to his investment property and becomes the Investor in the equity share.
Yes. You might joint venture with other investors or purchase interests in a LLC.
Typically, it depends on the return on investment the Investor desires. Ownership and sharing of appreciation are not necessarily the same. This factor is considered when setting the co-owners’ ownership interests. Remember, the Occupant Investor may elect 100% ownership at any time.
If a capital improvement is desired (i.e., a room addition), the Occupant Investor 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.
This is a bargaining point for the Investor and Occupant Investor. The Investor projects the minimum return he or she would like to see on investment. If not achieved, the equity share continues until reached. Alternatively, the Parties may elect merely to share the appreciation on some basis mutually agreeable.
Investors get the same tax benefits as a solely owned rental property, including depreciation on their ownership interest and tax-free gain by exchanging out at the end of the term.
Yes, the mixed tax treatment in the traditional equity share format is permitted by the IRS. Internal Revenue Code §280A allows the Occupant Investor to claim his interest in the property as his principal residence while the Investor claims his as his investment property.
Since the Occupant Investor lives in the entire property but only owns part, the IRS requires the Occupant Investor to rent the Investor’s interest in the property. What happens is the Occupant Investor 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 you to claim the property as your investment property and receive investment property tax treatment.
It should be at least three years and not much longer than seven. It can go on longer than this, but these are typical time-frames. At the end, you may elect to extend the agreement. Imagine equity sharing a property for the last 20 years. Big returns without hassles.
Yes, all co-owners are in the investment for the term of the agreement. But, if something unexpected happens, they can choose from the options described in the agreement or agree on some other solution agreed by the Parties.
Yes, with the consent of all parties.
Yes, but if a situation arises where the Occupant Investor cannot, the Equity Sharing Agreement allows it to be rented with the Investor’s consent.
Since the Occupant Investor receives full occupancy of the home, the Occupant Investor pays them at purchase and is not reimbursed. The Occupant Investor also pays them at sale if he makes the decision to move instead of buying out the Investor.
Yes, the Occupant Investor receives exclusive occupancy of the property and pays all its expenses.
While the equity is shared by the co-owners, typically, the Investor qualifies for the entire loan or has it in place at time of the Agreement. Occupant Investor is added at escrow close.
Loan Payments, Taxes, HOA fees, Insurance and Assessments are processed by an independent loan servicing company paid for by the Occupant Investor.