Benefiting from shared-equity financing arrangements.

Author:Ellentuck, Albert B.

Adult children can obtain home ownership, acquire a more expensive home sooner, or acquire a more expensive home than they might otherwise afford, by using a shared-equity financing arrangement whereby parents or other relatives share in the purchase and cost of maintaining a house used by the children as a principal residence (Sec. 280A(d)(3)). The nonresident-owner rents his or her portion of the home to the resident-owner and obtains the normal tax benefits of renting real estate if the statutory requirements are satisfied.

Since the child does not own 100% of the home, the child is a tenant as to the portion of the home the child does not own and rents that interest from the relative at a fair market rate. The fair market rent paid for the portion of the home that the child does not own can reflect a reduction that considers that the child will take better care of the home since he or she is both a family member and an equity owner (see Bindseil,T.C. Memo. 1983-411).

Under the vacation home rules, personal use of the home by a child or other relative of the property's owner is normally attributed to the owner (Sec. 280A(d)(2)). Thus, the nonresident-owner's personal use would normally exceed the greater of 14 days or 10% of fair rental days, causing the home to be treated as a vacation home where rental deductions are limited to rental income. However, an exception to the general rule exists when the dwelling is rented to a tenant for a fair market rent and serves as the lessee's principal residence (Sec. 280A(d)(3)(A)). When the tenant owns an interest in the property, this exception to the general rule applies only if the rental qualifies as a shared-equity financing arrangement (Sec. 280A(d)(3)(B)).

A shared-equity financing arrangement is an agreement by which two or more persons acquire qualified ownership interests in a dwelling unit and a person (or persons) holding one or more of the interests is entitled to occupy the dwelling as his or her principal residence and is required to pay rent to the other person(s) owning qualified ownership interests (Sec. 280A(d)(3)(C)). A qualified ownership interest is defined as an undivided interest for more than 50 years in the entire dwelling unit and any appurtenant land being acquired in the transaction to which the shared-equity agreement relates (Sec. 280A(d)(3)(D)). Actual ownership of at least 50 years is not required; i.e., the property may be disposed of before 50 years have passed...

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