Equity Sharing

The IRS approved Rent Own program

You know Rent Own is a pain in the a$$ as far as taxation and legal problems that you can have if the tenant buyer brings you to court and doesn’t like the paperwork. Even a judge can say that that particular lease option program is a “disguised installment sale”.

So how can you get involved with Landlording on automatic pilot that’s tax favored?

Well if you know the tax on Internal revenue code section 208A (see Tax Resources Equity Share) the IRS has a program that is tax favored on a rent to own transaction.

So let’s talk about it.

Let’s say that you are a landlord,

you hate tenants and
dealing with repairs and
dealing with toilets and
dealing with “Rent chasing”,
so you wanna do something different.

And you also don’t want the government involved with landlord tenant issues like we had with Covid!

So what can you do besides regular Landlording?

Well if you do a lease and a separate option it as many real estate educators talk about, having the option separate from the lease, that doesn’t necessarily solve problems because you still have a landlord tenant relationship.

You have two agreements: you have the lease and you have the option to purchase (purchase option)

When you give someone a purchase option they have equitable interest in the property. They have a chance to buy the property with the option. Some educators have used an agreement called a “contract for option to purchase” where the occupier does not get the option in their hand, but they get a chance to get a purchase option down the road.
But you’re still landlording.

There are certain states like New York and California that are “pro tenant” and if you go to a landlord tenant court situation, many of the judgments against you the investor will be prejudicial against investors regardless of the law or the irs tax situation.

So here is an interesting but not well known strategy to be able to truly help a buyer buyer property.

It’s not a landlord tenant relationship.

It’s very similar to selling the property on a contract for deed but it’s “tax favored” and I believe it could be doable in Texas, I’d have to check.

Texas has crazy laws about executable contracts, such as lease options and contracts for deed.

But I bet this particular IRA approved plan is doable because it’s federal and IRS approved so it should work in Texas.

So the first thing I would do is I would get a list of first home buyers that really want to own a home.

And they go through basic mortgage qualifying and find out what exactly do they need to be able to get a mortgage.

They could be self-employed people or problems with their credit or student loan debt or whatever.

You just have to make sure they’re making enough money (reasonable income and documenting income).

Once you get your list of

first homebuyers, then you want to get a list of landlords with nice properties.
Or FSBO trying to sell.
Or make a friend with a property manager that has a lot of rental owners landlords.

But you basically want to either buy the property and be in the contract yourself, or you can have an option to buy the property on an equity share contract with the intention of assigning your interests

This is similar to an option to buying (or selling) on a Contract for Deed or Land Contract.

So let’s say that you want to be doing a equity share with a property that you already own.
you wanna advertise for a buyer that could qualify down the road within five years.
They have really good income but there’s other issues holding them back.
Here is a possible format but this format does not have to be “in stone”, as there’s many ways to do it.
So let’s say that the investor buys the property with an 80% loan to value loan, and the investor puts 20% down and they own it.
The occupier, this is not a tenant but an occupier, puts down 3%, and the equity growth will be split 50-50.
It can be 1/3 to 2/3s.
The very best format is one that accommodates the financial and tax needs of both parties.
So while most of the down payment is contributed by the investor
The majority of the tax deductions will go to the occupier. This is one of the occupiers greatest advantages.
He turns his rental payments into valuable tax deductions.
Investor has his tax benefits to when he claims depreciation for the property and “1031 exchange out “ tax free at the end of the transaction so both will profit in the transaction.
So the occupier could pay the closing cost and receive tax benefits, but not reimbursement, in return.
In the equity share down payment and capital improvement contributions, both are treated as reimbursable payments returned to the paying parties before equity is split.
The occupier maintains the property and makes all improvements while the investor sits back awaiting his return and appreciation knowing that his investment is being taken care of because their agreement requires it.
So the traditional model would be that the occupier lives in the property and pays the expenses and Investor puts up most of the down payment funds.
They BOTH go on title and they SPLIT the appreciation (any split) and the tax benefits.

Another model could be a vacation home.
They could be two co-occupants ie two families sharing and cohabitating investment property.
You would need to state co-owner usage and rules and regulations but this form is a very advantageous model.

Lastly you can use a joint venture investor model, which investors buy a property and rent it out or they buy a property improve it and either hold it or sell it.

These days investors want to invest in real estate similar to how they did in the stock market, holding a small fractional interest; and they want more control and profit that is available with a real estate investment trust or a REIT.

Joint venture co-ownership fills that need.

Investors can also directly invest their retirement funds through a self-directed IRA account custodian,

I like the
www.theentrustgroup.com
or
www.trustetc.com

Each equity sharing agreement carefully guides the co-owners through the obligations each will assume and gives them a secure investment vehicle to co-own a property together for their mutual profit and enjoyment.

In closing,

there are pitfalls and headaches with traditional landlord tenant relationships.
A problem with Standard rent to own relationships, the tenant buyer cannot be required to keep the property in better shape than what the average tenant will do.
You can’t “contract out” of landlord tenant law.
I would think that with all the headaches of being a regular landlord, and worrying about having to foreclose on a contract for deed a wraparound mortgage….
if you sold on seller financing, this particular strategy of equity sharing with a young family over a long period of time like five years I think it is a great alternative.
And when they buy as an investor, you can 1031 and pay no tax on the sale.

We talk about this in our equity share classes at https://classes.reiskills.com/

Thanks for reading this article on equity share investments.

Brian Gibbons
818 400 3046
Brian@reiskills.com

https://classes.reiskills.com/