Home Equity Share Agreement

[stewartmorse03]

My wife and I helped our daughter purchase a condo.  We put up 20% down payment and have been contributing towards 20% of the expenses.  After the fact, I learned we should have a written Home Equity Agreement and that my daughter is supposed to be paying us 20% of the fair market rent which we would then use to pay our 20% share of the expenses.  Seems silly, but the IRS requires a rent payment if we want to take any deductions on our 20% of ownership as an income rental property on Schedule E.  To complicate things, my daughter rents out a room.  Does she need to pay us 20% of this rental income, or can that be treated as her separate income and she would then depreciate her 80% of the property value?  

Next question, what happens to our write deductions if we stop contributing towards 20% of the expenses at some time in the future?

[DianeW777]

It depends. One key component is whose name is listed as the owner of the condo? This dictates how everything is treated and who gets deductions. 

1. Unless you are listed as an owner, there is nothing you can expense in relationship to the condo.  
   1. If you are listed as part owner of the condo, and your daughter is not paying you rent for your 20% portion at fair rental value (FRV) for that area then you could use only mortgage interest (if you are liable for the mortgage loan payments) and property taxes paid (as part owner) if you can itemize deductions for 2023, because they are higher than your standard deduction.  
      • The IRS would require a rental agreement if you are a 20% owner of the condo on the purchase documents.  Then you could use expenses on Schedule E for your portion. You may want to consider this for 2024.
2. If your daughter is owner then she can rent a room, collect rent and must include this in her income, and can also deduct any expenses related to the room rental (square feet of room divided by total square feet of the condo.  This would be reported on Schedule E.
3. If your daughter is listed as sole owner of 100% of the condo, then only she could collect rent and deduct rental expenses based on the square feet calculation above.
   1. In this scenario, you would have no deductions for the condo regardless of what you pay.

[stewartmorse03]

Thank you for your prior reply.

My daughter, my wife and I are all listed on the deed.  My daughter and I are listed on the loan.  Percentages of ownership, 80/20, are only on the equity share agreement, not on the deed or loan. 

I would like to keep my daughter's rental of a room separate from the Equity Share agreement if possible.  That way, whenever she starts or stops renting a room, it would not affect my tax situation.  So based on your response can my daughter collect all the rent for the room she rents out and then would also pay my wife and I FMR for her percentage of ownership of the entire condo?  When she calculates depreciation does she depreciate just the fraction of the rental room sf/total SF or SF/80% of the total condo SF?

[DianeW777 · Accepted solution]

Yes, your daughter would report all rents received from the room rental and would enter rental income on her tax return. For tax purposes one third of the cost of the condo would be her asset for depreciation since she is one third owner, however continue to see additional information about the potential 80/20 breakdown.

Home equity share agreement definition (80/20 applies only to this agreement).

One (your daughter in this case) receives an equity advance in the form of a lump sum cash payment from an investment person (you as parent in this scenario). In exchange, one will give the investment person the right to a portion of your home's future fair market value (FMV). The agreement can be voided at any time.

Future would not affect your portion of a sale, since only she would depreciate her share of the property.  At a future sale, she would be required to recapture depreciation on her portion of the sale if there is a gain. 

You should check with an attorney to see how the home equity share agreement might apply to the actual ownership of the home.  If you have documents that show legally that your daughter actually owns 80% of the condo, then she could use that instead of the 33% based strictly on the deed.  And yes, she will use the square feet of the room against 33% or 80% of the total condo square feet, depending on the legal documents, to arrive at the business use percentage of the condo and all expenses related to the rental of the room.

This will be easy as far as setting up the assets, and then the expenses would need to be manually broken down by the amount your daughter actually pays, less any reimbursement from you, times the business use percentage to expense against the room rental income.

@stewartmorse03