We welcome our guest author Bob Hansell again. He left this as a comment and reminded me of it again yesterday. I reread it and liked it so much I wanted to share it with everyone in a more prominent position.
A House Divided
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Looking for a really great gift for your child or grandchild? How about a house? Of course, that's a bit of an exaggeration. But the idea isn't as far-fetched as you might think. You may be able to HELP your favorite young adult buy a home through an equity-sharing arrangement -- and give yourself some extra tax breaks, at the same time.
Utilities Not Included
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With an equity-sharing arrangement, you provide money for a down payment (or a portion of the down payment) and contribute toward the mortgage payments every month. Your child then pays you to rent your portion of the home.
The amount of rent your child pays you should be based on your percentage of ownership and fair market rental rates. You and your child would split the property taxes, homeowners insurance premiums, and maintenance expenses proportionately.
Tax Results
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For tax purposes, the rent you receive is passive income -- and it's taxable in the year you receive it. However, your out-of-pocket rental expenses are tax deductible. You can also claim depreciation deductions for your portion of the home.
If your expenses are greater than your rental income, your deduction for the loss will be limited by the tax law's "passive activity" rules. Under those rules, losses are deductible only up to the amount of any other passive income you might have, plus another $25,000 if your adjusted gross income is $100,000 or less, and you "actively participate" in management decisions regarding the home's upkeep, etc. (The $25,000 loss allowance is phased out as income rises from $100,000 to $150,000. It's $12,500 for a married person filing separately, subject to phaseout as income rises from $50,000 to $75,000). Any losses that aren't deductible because of these rules can be carried over and applied to passive income in future years -- or deducted in full when you sell your interest in the home (perhaps eventually to your child).
To Market, To Market, To Sell ...
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When the time comes to sell, whether you sell your interest to your child, or the home is sold on the real estate market, your profit (if any) will be taxable as a capital gain. If you've owned your interest for more than a year, the profit will be taxed at the long-term capital gains rate (no more than 15% through 2010).
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